City of New Brunswick v. State Division of Tax Appeals, Dept. of Treasury

• Decision Date: 02 April 1963
• Docket Number: No. A--74,A--74
• Citation: 39 N.J. 537,189 A.2d 702
• Parties: (1958 Tax) CITY OF NEW BRUNSWICK, New Jersey, Appellant, v. STATE of New Jersey DIVISION OF TAX APPEALS, DEPARTMENT OF the TREASURY and National Shoe Sales, Inc., Respondents. (1959 Tax) CITY OF NEW BRUNSWICK, New Jersey, Appellant, v. STATE of New Jersey DIVISION OF TAX APPEALS, DEPARTMENT OF the TREASURY and National Shoe Sales, Inc., Respondents.
• Court: New Jersey Supreme Court

Page 537

39 N.J. 537

189 A.2d 702

(1958 Tax) CITY OF NEW BRUNSWICK, New Jersey, Appellant, v. STATE of New Jersey DIVISION OF TAX APPEALS, DEPARTMENT OF

the TREASURY and National Shoe Sales, Inc., Respondents.

(1959 Tax) CITY OF NEW BRUNSWICK, New Jersey, Appellant, v. STATE of New Jersey DIVISION OF TAX APPEALS, DEPARTMENT OF

the TREASURY and National Shoe Sales, Inc., Respondents.

No. A--74.

Supreme Court of New Jersey.

Argued Feb. 4, 1963.

Decided April 2, 1963.

Frederick F. Richardson, New Brunswick, for appellant and cross-respondent.

Lawrence L. Lasser, Newark for respondent and cross-appellant National Shoe Sales, Inc. (Kristeller, Zucker, Lowenstein & Cohen, Newark, attorneys, Lasser & Lasser, Newark, of counsel, B. William Hochman, Newark, on the brief).

Arthur J. Sills, Atty. Gen., of New Jersey, filed statement in lieu of brief on behalf of respondent Div. of Tax Appeals (Alan B. Handler, Deputy Atty. Gen., of counsel).

The opinion of the court was delivered by

WEINTRAUB, C.J.

These cases involve tax assessments for 1958 and 1959 of a parcel of commercial property, 354 George Street, in the City of New Brunswick. Both the City and the taxpayer appealed from the judgments of the Division of Tax Appeals, and we certified the matters before they were argued in the Appellate Division.

The issues are whether the Division erred in its findings of (1) full value and (2) the 'common level' of assessments in the City, to which it reduced the full valuation of the property. We will consider the second issue first.

I.

It appears without question that real property in the City was not assessed for either year at full true value or any uniform percentage of it. The taxpayer sought a reduction to the 'common level' under In re Appeals of Kents 2124 Atlantic Ave., Inc., 34 N.J. 21, 166 A.2d 763 (1961). The Division found the common level to be 33 1/3% Of full value and granted relief on that basis.

The City contends there was no common level. There was none, in the sense of a single level consciously applied by the assessor to all real property. Rather the rolls with their diverse treatment of property were repeated from year to year without appraisal. The assessor testified that the assessments in the neighborhood of the property here involved were understood by him to be at 43% Of full value. The available sales data indicates the average ratio for all real property to be 33.39% For 1958 and 30.05 for 1959. We are satisfied the showing warranted relief under Kents.

The Division used 33 1/3% For each year. The taxpayer complaints that the Division did not use 30% For 1959 in accordance with the average ratio as found by the State Director of Taxation. We think the Division's finding was sound. As a practical matter there must be a large measure of stability in the assessment of property, Switz v. Township of Middletown, 23 N.J. 580, 596, 130 A.2d 15 (1957); Hackensack Water Co. v. Division of Tax Appeals, 2 N.J. 157, 163, 65 A.2d 828 (1949), and hence the common level should not fluctuate from year to year. We noted in Kents that in the use of the average ratio (34 N.J., at p. 31, 166 A.2d at p. 768) '* * * The trier of the facts may properly consider any weakness which may appear, as, for example, a paucity of sales in the municipality concerned or some imbalance caused by unusual experience. To that end, Consideration may be given to the average ratio of other years and to such appraisals of properties as the trier of the facts may feel to be necessary to assure that the average ratio is not grossly deceptive as a fair gauge of the ratio of assessment to market value.' (Emphasis added.)

And the Division correctly held that the reduction should be to the common level of all real property rather than to the level of commercial property alone. Siegal v. City of Newark, 38 N.J. 57, 183 A.2d 21 (1962).

II.

The remaining question concerns the valuation of the property. The property is '100 percent' commercial property and consists of a plot 30 feet by 156 feet with a two-story brick store building with basement.

The taxpayer leased the property to a retail shoe company for the period May 1, 1941 to April 30, 1962 at a net rental, after taxes, of $8,000 per year plus 6% Of sales in excess of a stipulated figure. The record indicates that no additional rent was paid under the percentage provision, at least after 1957. On March 8, 1960 (this of course was long after the assessment dates here involved), the parties extended the lease to April 30, 1967, reducing the fixed annual rent from $8,000 to $6,000, effective as of May 1, 1960.

For each of the years in question, the property was assessed at $93,450, of which $50,450 was for land and $43,000 for building. The assessor testified, as we mentioned above, that he understood the assessments to be at 43% Of full value. He said also that these assessments are consistent with the others in the neighborhood, land in this immediate area being valued at $3,500 per front foot and the land in question at $3,800 per foot because of its extra depth.

Each side relied upon one expert. The expert for the taxpayer reached the figure $111,700 for 1958, of which he allocated $79,600 to land and $32,100 for improvement. For the year 1959 his total figure was $107,000. These values were reached by capitalization of net income. In support of that approach the witness said the property is particularly suited for investment purposes and to an investor it is the expected flow of income which controls the price he will pay. The allocations between land and building were made by valuing land at $2,600 per front foot for 1958 and $2,500 per front foot for 1959, the residue being attributed to building.

The City's expert used both the reproduction approach and the income approach. As to reproduction, he took land at $3,800 per front foot (the same figure the assessor says was in fact used), for a total of $114,000. The building, less 15% Depreciation, was valued at $95,600, making a total valuation of $209,600. On the income approach, the witness found a fair gross rental would be $19,800, from which he deducted 10% For vacancy, leaving $17,800 from which he deducted 40% ($7,100) for all expenses, including taxes. There remained net income of $10,700, which, capitalized at 5%, yielded $214,000. The witness, using his reproduction figure, said the 'warranted' assessment (i.e., at 42.5% Of full value) would be $89,100, allocable $48,450 to land and $40,650 to building.

The Division found that 'Such property is usually purchased and sold not on the basis of reproduction value or on the basis of comparable sales but on the basis of yield to the investor.' It emphasized the property was leased for a long term to a 'national corporation of recognized ability to meet the terms of the lease.' It thereupon took the actual net rental payable, $8,000, and applied 5%, the capitalization rate advocated by the City's expert, for a total valuation of $160,000. Of this $100,000 was allocated to land and $60,000 to building.

The search, of course, is for the fair value of the property, the price a willing buyer would pay a willing seller. Consideration may be given to cost less depreciation and sales of comparable property. It may also be given to rental income. Aetna Life Insurance Co. v. City of Newark, 10 N.J 99, 106, 89 A.2d 385 (1952); Appeal of Pennsylvania Railroad Co., 20 N.J. 398, 412, 120 A.2d 94 (1956); Annot., 95 A.L.R. 442 (1935). There can be no rigid rule. The answer depends upon the particular facts and the reaction to them to experts steeped in the history and hopes of the area.

In a given case capitalization of income may predominate in the expert's opinion. The Division so viewed the present matter, as it properly could on the evidence before it. But the problems to which we will now refer suggest the care with which the income method must be used and indicate as well that one should hesitate to accept its answer without checking against all available data.

A.

The first problem is to find the fair rental value to which the capitalization rate will be applied. The taxpayer uses the $8,000 figure contained in its own lease. The City contends for $10,700, which its expert reached by starting with a hypothetical gross rental value of $19,800 less a vacancy factor of 10% And less 40% For all expenses including taxes. No doubt the fair rental value, rather than the actual rent payable under an existing lease, must control. Somers v. City of Meriden, 119 Conn. 5, 174 A. 184, 186--187, 95 A.L.R. 434 (Sup.Ct.Err.1934), annotated 95 A.L.R. 442 (1935); People ex rel. Gale v. Tax Comm'n of City of New York, 17 A.D.2d 225, 233 N.Y.S.2d 501, 506--507 (1st Dept. 1962). True, the value of a parcel of property may in fact be affected by the prudence or imprudence of its owner, and so a long-term lease for an unfavorable rent will impair the selling price, just as a long-term lease to a triple-A tenant at a high rental may make the property more attractive to a buyer. But the valuations of properties for local taxation cannot vary with the managerial successes or failure of the owners. Adjacent properties of equal potential cannot be assessed differently because one proprietor was more or less astute than the other.

The expert for the taxpayer claimed the rent actually payable under the lease was in line with rents payable for comparable property. He accordingly used the contract rent of $8,000 per year. Prior to trial he had valued the property at $133,000 upon that basis. At the trial, however, his figure for 1958 was $111,700 and for 1959 was $107,000. The reason was that he took account of ensuing events, including the reduction in rent which the parties negotiated long after the assessing dates here involved. As to this modification, the Division correctly held that the valuation, although based upon a forecast of earnings, must be found upon what was known and...