Carteret Holdings Urban Renewal, LLC v. Carteret Borough Block 7402

• Docket Number: 004485-2018,002718-2019
• Decision Date: 14 December 2021
• Parties: Carteret Holdings Urban Renewal, LLC v. Carteret Borough Block 7402, Lot 4
• Court: New Jersey Tax Court

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Carteret Holdings Urban Renewal, LLC
v.
Carteret Borough Block 7402, Lot 4

Nos. 004485-2018, 002718-2019

Tax Court of New Jersey

December 14, 2021

Amber N. Heinze, Esq. Irwin & Heinze, P.A. Attorney for Plaintiff

Gregory J. Haley, Esq. DeCotiis, Fitzpatrick, Cole & Giblin, LLP Attorney for Defendant

MALA SUNDAR, PRESIDING JUDGE

Dear Counsel:

This opinion decides whether the local property tax assessment for the above referenced property (Subject) should be increased from $8, 775, 000 to $12, 000, 000, which is opined to be its true value by defendant's (Borough) real estate appraiser for each tax year 2018 and 2019, based on an income and sales comparison approach, with heaviest weight to the former.^[1]

The primary issue is whether the Borough's appraiser's use of the Subject's income and expense (I&E) statement as of December 31, 2018, to conclude a value opinion for both tax years is reasonable. Plaintiff contends the appraiser should have analyzed comparable rents and operating expenses from the market for either tax year instead of using only the December 2018 I&E information which reported higher rental income and lower operating expenses than in 2017. The Borough argues that its appraiser correctly used the 2018 income because the government allowed plaintiff to charge higher rents as of August 1, 2017, for the ninety Section 8 units in the

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Subject, and that the appraiser reasonably disregarded the 2017 I&E statement since the expenses for repairs and maintenance (R&M) were unusually large as compared to those expenses in 2018 ($310, 972.62 versus $175, 395).

For the reasons following, the court finds that the appraiser's choice to use the Subject's rental income reported on the 2018 I&E statement is reasonable. However, his decision to reject the 2017 operating expenses without attempting to stabilize the R&M expenses for the tax years at issue is not credible, as was his assumption that the R&M expenses includes a provision for reserves, a normally accepted operating expense in an income-producing property such as the Subject. Since the court was not provided any data to determine the reasonable range of R&M expenses, or an appropriate provision for reserves, it cannot conclude the Subject's net operating income under the income approach for either tax year. Therefore, the Borough has failed to persuade the court that the assessments for either tax year should be increased.

SUBJECT DESCRIPTION

The Subject is a 5.166-acre lot improved by a circa 1969 garden-style apartment complex comprising of ten, two-story buildings. It is in the Residential Multi-family (R-M) zone and is located amongst a mix of multi-family apartments, some 1-4 family dwellings, and industrial buildings. All 101 units are rented except one which is used as an office. Of the 100 units, ninety are Section 8 units (19 one-bed; 46 two-bed; 25 three-bed) and ten are conventional (non-section 8) units (one one-bed; 3 two-beds; 6 three-beds).

Each unit is provided two surface parking spaces. There are visitor parking spots also. The complex has a coin-operated laundromat which tenants pay to use. Per the Borough's appraiser, individual apartments range from good to average condition, and the interior and exterior of the Subject is in average condition. The appraiser's report also noted that tenants pay for heat, electric,

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and additional window air conditioning units, while the landlord provides water, sewer, garbage removal, and through-wall air conditioning units.

The Subject is a Section 8 project which provides subsidized housing for eligible tenants as determined by the United States Department of Housing and Urban Development (HUD). See 42 U.S.C. §1437f. It receives housing assistance payments under a housing assistance payment (HAP) contract with HUD, which is administered by the New Jersey Housing and Mortgage Finance Agency (NJHNFA). A portion of the rent is paid by the assisted (low income) tenant and the remaining by HUD. Per the appraiser, the leases were short-term.

On August 1, 2017, plaintiff executed a renewal HAP contract for a 20-year term. The NJHMFA determines the "contract" rent for the units (a unit's "total monthly rent . . . including the tenant rent" which is the "portion . . . paid by the assisted family"). See also 42 U.S.C. §1437f(c)(3) ("amount of monthly assistance payment . . . shall be the difference between the maximum monthly rent which the contract provides that the owner is to receive for the unit and the rent the family is required to pay under" the HUD law). The rents are revised (up or down) to comparable market rents every five years and once during the five-year period.^[2] See also 42 U.S.C. §1437f(c)(2)(A) ("The assistance contract shall provide for adjustment annually or more frequently in the maximum monthly rents . . . to reflect changes in the fair market rentals established in the housing area for similar types and sizes of dwelling units"). Annual adjustments to the contract rent are also permitted based on changes to operating cost or project budget but will

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not result in a decrease to the contract rent. See also 42 U.S.C. §1437f(c)(2)(B) (contract to provide for "additional adjustments" as needed to "reflect increases in the actual and necessary expenses of owning and maintaining the units which have resulted from substantial general increases in real property taxes, utility rates, or similar costs").

The contract rents for the Subject are deemed to be "post-rehabilitation," which is defined to include capital repairs made to the units and are effective August 1, 2017 (although repairs can be commenced 30 days after this date and completed within a year thereafter unless extended). Repairs, proposed by plaintiff's "scope of work," must be performed in compliance with all laws. If capital repairs are not made, then the contract rents are termed as "pre-rehabilitation," and are $100 lower per unit type than the post-rehabilitation rents. A utility allowance is provided either way. Thus:

Units	Monthly Post-Rehab Rent	Monthly Pre-Rehab Rent	Utility Allowance
19 one-bed	$1, 260 x 19 = $23, 940	$1, 160 x 19 = $22, 040	$ 81 x19 = $1, 539
46 two-bed	$1, 630 x 46 = $74, 980	$1, 530 x 46 = $70, 380	$124 x 46 = $5, 704
25 three-bed	$1, 830 x 25 = $45, 750	$1, 730 v 25 = $43, 250	$130 x 25 = $3, 250
NET MONTHLY[3]	$144, 670	$135, 670	$10, 493
NET ANNUAL	$144, 670x12 = $1, 736, 040	$135, 670x12= $1, 628, 040
GROSS MONTHLY	$144, 670+$10, 493=$155, 163	$135, 670+$10, 493=$146, 163
GROSS ANNUAL	$155, 163x12 = $1, 861, 856	$146, 163x12 = $1, 753, 956

Plaintiff's I&E statement as of December 31, 2017, shows the potential gross income (PGR) for all units (i.e., including the ten conventional apartments) as $1, 714, 517 ($1, 727, 717 less $13, 200 for "non-revenue" unit, i.e., office). No rent roll was included showing rents from the Section 8 units. Operating expenses totaled $747, 413.25 (less real estate tax and debt service).^[4]

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The I&E statement as of December 31, 2018, shows the PGR for all units as $1, 897, 451 ($1, 910, 651 less $13, 200 for rent attributed to office). The rent roll for December 2018 shows each unit's lease rents and amounts billed (due to utility adjustments). Included was a column "Market+Addl." which reflected the Section 8 units rents $1, 280 (one-bed); $1, 656 (two-bed); and $1, 859 (three-bed) during 2018. The lease rent column showed the same amount but split between the resident and subsidy. The non-section 8 units were leased at varying rates, which per the summary averaged at $1, 230 (one-bed); $1, 078 (two-bed); and $1, 205.33 (three-bed). $1, 100 was attributed to the office. The total monthly lease rent for the 100 units was $160, 568 (and reflected as the PGR in the summary portion of the rent roll), whereas the total of the "Market+Addl." was slightly lower at $159, 768. The total billed was $159, 468 (with utility adjustments). The summary breaks this down as $5, 708 ("housing"); $32, 583 ("resident" rent); $121, 197 ("subsidy" rent of which $1, 351 is utility reimbursement). Operating expenses totaled $656, 364 (exclusive of real estate tax and debt service).^[5]

THE BOROUGH'S VALUE CONCLUSION

The Borough's appraiser (accepted as an expert in real estate appraisal by the court with no objection by plaintiff) used the income and sales comparison approach as valuation techniques. Under the income approach, he used the rental income reported by plaintiff on its 2018 I&E (but noting that the monthly rental income as of September 30, 2018, was $159, 138, which annualized was $1, 909, 656). He used all other the amounts reported on the I&E (other income, deductions for vacancies, bad debt, non-revenue unit used as office, and operating expenses except for real estate taxes and debt service totaling $670, 770) in arriving at a net operating income (NOI) of $1, 243, 902.

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Using the band-of-investment method, he applied a capitalization (Cap) rate of 6.75%, which he loaded with the effective tax rate for tax year 2018 ($2.929), for an overall Cap rate of 9.678%. This provided a value of $12, 850, 000 (rounded) which he concluded was the value for both tax years 2018 and 2019. The effective tax rate for tax year 2019 was $2.889 ($3.001 x 2019 equalization ratio of 96.27%), which provides an overall Cap rate of 9.639% (6.75%+2.889). This would provide a value of $12, 809, 893 ($1, 243, 901 NOI ÷ .09639).

Under the comparable sales approach, the appraiser used six sales of apartment complexes with the number of units ranging from 26 to 68; sale dates ranging from April 2017 to February 2019; and sale prices ranging from $2, 625,...