Bostian v. Franklin State Bank
| Decision Date | 05 April 1979 |
| Parties | Clarence L. BOSTIAN, Jr., and/or Franklin Township Taxpayers Association, Inc., Petitioner-Appellant, v. FRANKLIN STATE BANK, Township of Franklin, Respondent-Respondent and Cross- Appellant. |
| Court | New Jersey Superior Court — Appellate Division |
Leo Rosenblum, Jersey City, for petitioner-appellant (Rosenblum & Rosenblum, Jersey City, attorneys).
Richard A. Norris, Somerville, for respondent-respondent and cross-appellant (Norris, McLaughlin & Marcus, Somerville, attorneys; Victor S. Elgort, Somerville, on the brief).
Before Judges ARD and ANTELL.
The opinion of the court was delivered by
ANTELL, J. A. D.
Petitioner instituted this proceeding by filing an appeal with the Somerset County Board of Taxation, seeking an increase in the 1972 real property tax assessment levied against respondent Franklin State Bank (bank) by the Township of Franklin (township). The county board of taxation affirmed the assessment and petitioner appealed to the State Division of Tax Appeals (Division) where, pursuant to a written opinion dated March 2, 1978, the assessment was moderately increased. On appeal therefrom petitioner's central contention is that the determination arrived at in the Division still reflects a substantial undervaluation of the building. The bank denies any undervaluation and on its cross-appeal asserts that the Division erred in refusing to allow a reduction from value for physical depreciation and obsolescence and in the inclusion of certain personal property in determining value.
The property is a two-story home office bank building which was completed in 1970 and for which a certificate of occupancy was issued October 1, 1970. The critical evidence as to value was received through the testimony of three witnesses: the township assessor, a real estate appraiser produced by the bank, and a real estate appraiser produced by the petitioner. All agreed that the correct approach to valuation of this special purpose building was to ascertain the cost of reproduction as of the valuation date, October 1, 1971, less an allowance for depreciation and obsolescence. Anaconda Co. v. Perth Amboy, 157 N.J.Super. 42, 46-47, 384 A.2d 531 (App.Div.1978). The assessor, using an index in the Real Property Appraisal Manual For New Jersey Assessors, 1 first ascertained the unit construction cost as of 1954 for buildings of the classification which he determined was applicable to the bank. To this he applied a cost conversion factor of 1.57 to bring this figure into harmony with current economic conditions. After allowing for 3% Physical depreciation he arrived at a valuation of $1,319,600.
The bank's appraiser, utilizing a different standard index, the Dodge Building Cost Calculator, determined a unit construction cost as of 1970 and brought this figure up to date by applying a cost conversion factor of 1.128. He then deducted 2% For physical depreciation and 35% For obsolescence and arrived at a true value of $1,145,450.
Petitioner's expert also used the New Jersey Appraisal Manual, as did the township assessor, in estimating the bank's value for 1954. However, he used a different building classification than did the assessor. He also applied a different cost conversion factor of 2.19. This figure is made applicable by the Handbook for New Jersey Assessors to building costs in New Brunswick and he used it for the reason that "New Brunswick was located nearby." Using these figures, after allowing 2% For depreciation, his valuation was $2,495,700. In addition to valuation based on estimated reproduction cost, petitioner's witness also fixed a valuation based upon the actual original costs of construction which were obtained from a bank official on depositions. Incurred during 1969, these costs totalled $1,940,096, which were trended up to the valuation date by a conversion factor of 1.27. He then allowed 2% For physical depreciation and arrived at a net reproduction cost of $2,414,600.
The relevant figures are summarized in the following chart:
Township Assessor Bank's Expert Taxpayers' Expert
----------------- ---------------- --------------------------
N.J. Manual Dodge Calculator N.J. Manual Actual Figure
----------------- ---------------- ----------- -------------
Year 1954 1970 1954 1969
------------ ----------------- ---------------- ----------- -------------
$ 866,504 $1,317,156 $1,075,848 $1,940,096
Conversion
------------
Factors 1.57 1.128 2.19 1.27
------------ ----------------- ---------------- ----------- -------------
1971 Cost $1,360,412 $1,818,174 $2,546,607 $2,463,922
Minus
------------
Depreciation 3% 37% 2% 2%
----------------- ---------------- ----------- -------------
$1,319,600 $1,145,450 $2,495,700 $2,414,600
Plus
------------
Land $ 145,400 $ 232,695 $ 203,000 $ 203,000
----------------- ---------------- ----------- -------------
Final Value $1,465,000 $1,378,145 $2,698,700 $2,617,600
Assessed
------------
Value $ 732,500 $ 689,072 $1,349,350 $1,308,800
------------
(50% of
true value)
The judge of taxation accepted the assessor's unit construction costs and conversion factor. From these he determined an estimated reproduction cost as of the valuation date, October 1, 1971, of $1,360,447. To this he added $150,000 for equipment which he found should have been treated as part of the realty and taken into account by the assessor. In arriving at a true value of $1,410,500 he disallowed physical depreciation for the reason that the building was "brand new." Value of the land was fixed at $214,700 and this figure is not in dispute. The record demonstrates that the following determinations were made by the judge of taxation:
1971 Cost $1,360,447
"Adjusted" Cost $1,410,500 ($150,000 equipment assessment)
Land $ 214,700 (not disputed)
----------
Final Value $1,625,200
Assessed Value $ 812,600
It is apparent that an arithmetical error was made in the amount of $100,000 by the judge in adding the cost of equipment.
The gist of petitioner's challenge to the determination below is expressed in the following language of its brief:
Instead of using the actual cost of the bank building as shown by the deposition of a Bank official and the New Jersey Assessor's Manual, the Division chose to accept cost figures submitted by the Assessor.
The issue thereby raised is whether valuation of this relatively new building must be governed by its actual original construction costs and petitioner's approach to estimated reproduction cost.
It is well settled that original cost of construction is properly to be considered on the question of valuation for tax purposes. But it is by no means controlling. Trenton v. John A. Roebling Sons Co., 24 N.J.Super. 213, 217, 93 A.2d 785 (App.Div.1953); Kearny v. Tax Appeals Division, 137 N.J.L. 634, 637, 61 A.2d 208 (Sup.Ct.1948); Ridgewood v. State Bd. of Tax Appeals, 129 N.J.L. 121, 122, 28 A.2d 303 (Sup.Ct.1942); 72 Am.Jur.2d, State and Local Taxation, § 765 at 88; 84 C.J.S. Taxation § 410 at 786; Annotation, "Original cost of construction or reproduction cost as proper factors in assessing real property for taxation," 104 A.L.R. 790-94 (1936). The utility of cost figures, whether estimated or actual, lies in the fact that they are or may be criteria illuminating the ultimate question of fair market value. For taxation purposes fair market value is the price which could be obtained for the property, in money, at a fair sale between a willing seller not obliged to sell and a willing buyer not obliged to buy. In re Appeal of East Orange, 80 N.J.Super. 219, 230-31, 193 A.2d 377, certif. den. 41 N.J. 200, 195 A.2d 459 (1963); Sorokach v. Trusewich, 35 N.J.Super. 86, 89, 113 A.2d 194 (App.Div.1955); N.J.A.C. 18:12-4.8(a). That a building was "overbuilt," as the assessor and the bank's expert opined this one was, either to satisfy the whim of its owner, or to meet a special purpose, or out of extravagance, does not command the expectation that such an investment will be reflected in the building's fair market value. 84 C.J.S. Taxation § 411 at 804. As stated in Haworth v. State Board of Tax Appeals, 132 N.J.L. 306, 40 A.2d 353 (Sup.Ct.1944):
Cost is never conclusive on the question of value for tax purposes. Expensive buildings are frequently sold for much less than cost as is common knowledge. (at 308, 40 A.2d at 354)
Clearly, the judge of taxation was not obliged as a matter of law to base his determination of true value on the building's actual construction costs.
The controversy below lay between the assessor and the bank's expert on the one hand and petitioner's expert on the other. It centered on economic conditions within the area and their impact on market value. The assessor and the bank's expert were in accord that the neighborhood was deteriorating and that this would undoubtedly depress a negotiated sales price with a prospective buyer. The assessor alluded to a shopping center across the street "which is now almost completely empty." He referred to other vacancies and testified that the vacancy rate in certain buildings sometimes runs as high as 50%. The area is also experiencing considerable vandalism and a rising crime rate, thus creating a demand for security and discouraging business traffic. The assessor further noted that as of the valuation date the bank was functioning as a nonconforming use in the area under the then existing zoning ordinance, a factor adverse to value.
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