Glen Wall Associates v. Wall Tp.

• Decision Date: 09 May 1985
• Citation: 99 N.J. 265,491 A.2d 1247
• Parties: GLEN WALL ASSOCIATES, Plaintiff-Appellant, v. TOWNSHIP OF WALL, Defendant-Respondent.
• Court: New Jersey Supreme Court

Page 265

99 N.J. 265

491 A.2d 1247

GLEN WALL ASSOCIATES, Plaintiff-Appellant, v. TOWNSHIP OF WALL, Defendant-Respondent.

Supreme Court of New Jersey.

Argued Jan. 7, 1985.

Decided May 9, 1985.

Alan R. Hammer, Roseland, for plaintiff-appellant (Brach, Eichler, Rosenberg, Silver, Bernstein, Hammer & Gladstone, Roseland, attorneys; Alan R. Hammer and Michael Pesce, Roseland, of counsel; Michael Pesce, Roseland, on brief).

William P. Gilroy, Manasquan, for defendant-respondent (Mangini, Gilroy, Cramer & McLaughlin, Manasquan, attorneys; Marie C. Hanley, Manasquan, on brief).

The opinion of the Court was delivered by

GARIBALDI, J.

At issue here is the 1980 real property tax assessment of a garden apartment development located in Wall Township. The appeal concerns the issues involved in valuing a commercial building under the building residual technique as an application of the income approach to value (building residual technique). Specifically, we review the Tax Court's decision, which rejected the taxpayer's expert's (1) use of the assessed value of the land divided by the Chapter 123 ratio to determine the market value of the land, (2) use of stabilized actual rent to determine economic rent, and (3) use of rates of return on alternative investments to determine the capitalization rate. In addition, we examine whether the Tax Court should have considered the sale of the property within three months of the assessment date as an indicator of its value. Subsumed in these issues are the practical and realistic ends to which the Tax Court should expect an expert to go to support his opinion, in view of the costs to the parties and the judicial system.

The original assessment of the Glen Wall Heights Garden Apartment Development for the tax year at issue was:

                Land          $102,300
                Improvements   642,300
                              --------
                Total         $744,600
                

The property consists of approximately 6.5 acres, upon which five two-story brick and frame garden apartment buildings have been constructed. The buildings, which were constructed in the early 1960's, ¹ are generally in good condition and the neighborhood has other similar garden apartment developments. The property has no garages but there is ample open parking on the premises.

The complex contains 78 units; 58 apartments have 3 1/2 rooms and 20 have 4 1/2. In January of 1980 the monthly rents ranged from $219 to $275. As of October 1, 1979, the critical assessing date, each tenant had a one-year lease, was provided with heat, water, and cooking gas, but paid for his own electricity. Laundry equipment was provided on the premises on a concession basis. There was no rent control in Wall Township.

Glen Wall Associates (Glen Wall) acquired the property on December 20, 1979 for $1,375,000. The purchase price consisted of a cash payment of $323,000, the assumption of a six-percent mortgage of $352,000, and a purchase money mortgage of $700,000 at six and one-half percent which escalates to ten percent by 1987. Neither mortgage contained a personal guarantee of the purchaser.

After unsuccessfully challenging the assessment of its property before the Monmouth County Board of Taxation (Board), Glen Wall filed a complaint with the Tax Court seeking review of the Board's judgment. The Tax Court affirmed the original assessment. Glen Wall Assocs. v. Wall Township, 6 N.J.Tax 24 (1983). The Appellate Division affirmed substantially for the reasons stated in the Tax Court opinion. 6 N.J.Tax 448 (N.J.Super.A.D.1984). We granted the taxpayer's petition for certification. 97 N.J. 661, 483 A.2d 181 (1984).

I

In challenging the Township's assessment Glen Wall's expert used the building residual technique to arrive at a market value of the property in 1980 of $918,000, and an assessed value of $468,200. The building residual technique is an acceptable method of appraising income-producing property. Fort Lee v. Hudson Terrace Apartments, 175 N.J.Super. 221, 417 A.2d 1124 (App.Div.1980), certif. den., 85 N.J. 459, 427 A.2d 559 (1981); Middlesex Builders v. Township of Old Bridge, 1 N.J.Tax 305 (1980); American Institute of Real Estate Appraisers, The Appraisal of Real Estate 42, 50 (8th ed. 1983). Under this technique the value of the land is ascertained and a portion of the net operating income of the property is attributed to it. The residual income that is attributable to the improvements is capitalized and a value is determined for the improvements. The value thus determined for the improvements is added to the land value and a total value for the property is ascertained. Glen Wall Assocs., supra, 6 N.J.Tax at 28-29 (citing American Institute of Real Estate Appraisers, The Appraisal of Real Estate, 405-06 (7th ed. 1978). Specifically, the taxpayer's expert applied the building residual technique as follows:

1. He determined the market value of the land to be $200,000 (he accepted Wall Township's assessment of the land at $102,300 and divided it by the Chapter 123 ratio ² of 51%);

2. He ascribed $24,940 of the net operating income of $132,426 to the land by setting a capitalization rate for the land of 12.47 (10% return + 2.47% effective tax rate);

3. He attributed the remaining income of $107,486 to the improvements 4. He capitalized the income earned by the improvements at 14.97% (10% return + 2.50% recapture + 2.47% effective tax rate = 14.97%) to set their market value at $718,000;

5. He added the market value of the improvements to the market value of the land to arrive at a market value for the entire property of $918,000; and

6. He multiplied the market value of the property by the Chapter 123 ratio of 51% to arrive at an assessment of $468,200.

In valuing the property the Township's expert utilized the economic approach, supported by comparison sales. He arrived at a market value as of October 1, 1979 of $1,326,500. The Township's assessment of $744,600, 56% of value, exceeds the 1980 Chapter 123 ratio of 51% but is within Chapter 123 limits.

II

In applying the building residual technique an expert must first determine the market value of the land. As noted, the taxpayer's expert determined the market value of the land by accepting the land assessment of $102,300 and dividing that assessment by 51%, the Chapter 123 ratio. ³

The Tax Court held that "it is not acceptable nor appropriate to divide the land assessment by the Chapter 123 ratio to determine the land value. Brick Assocs. v. Brick Township., 4 N.J.Tax 510 (1982). Such a methodology for valuation is not a substitute for proper appraising practice." Glen Wall Assocs., supra, 6 N.J.Tax at 29. Thus the Tax Court held that an expert, in utilizing the building residual technique, may not challenge only part of an assessment, but must reject it entirely and provide his own independent appraisal.

The Tax Court's holding is contrary to 525 Realty Holding Co. v. Hasbrouck Heights, 3 N.J.Tax 206 (1981) and Middlesex Builders v. Township of Old Bridge, 1 N.J.Tax 305 (1980). These cases both involve an expert's valuation of a garden apartment complex by the building residual method. In both cases the Tax Court permitted use of the assessed value of the land in the application of the building residual technique. In Middlesex Builders the court held that the value of the land would be "in accordance with the judgment of the County Board since there was no evidence which would overcome the presumption of correctness as to the land value." Middlesex Builders, supra, 1 N.J.Tax at 316. In 525 Realty Holding Co., supra, 3 N.J.Tax 206, in computing true value the Tax Court attributed a portion of the total income to the land by dividing the land assessment ($85,500.00) by the applicable ratio (43%) to arrive at a true value of the land of $198,800. Id. at 216. This is precisely the methodology utilized in this case by the taxpayer's expert.

We accept the taxpayer's expert's methodology, as approved in Middlesex Builders and 525 Realty Holding Co., and reject the Tax Court's holding that the expert's use of the assessed value does not constitute sufficient supportable evidence of the value of the land. It is well established that there exists a presumption in favor of a tax assessment made by the local taxing authority. This presumption can be overcome only by the presentation by either party of sufficient competent evidence. It has not been argued that the Township produced sufficient evidence to overcome the presumption. Absent the introduction of such evidence the assessment stands. Aetna Life Ins. Co. v. Newark, 10 N.J. 99, 105, 89 A.2d 385 (1952); Riverview Gardens v. North Arlington, 9 N.J. 167, 174-75, 87 A.2d 425 (1952).

Not only is there a lack of authority for rejecting an expert's use of the assessed value of the land in applying the building residual technique, but also common sense dictates that such an approach be accepted. If a taxpayer does not wish to contest part of a township's assessment, he should be able to concede that fact rather than be forced to litigate an issue upon which the parties have agreed. To force the taxpayer to produce expert evidence on this point would waste the parties' and the judicial system's time and money.

Accordingly, we hold that in applying the building residual technique the taxpayer's expert properly relied on the assessed value of the land, while challenging the assessed value of the improvements. Moreover, the assessed value of the land, adjusted by the Chapter 123 ratio, furnishes sufficient and competent evidence of the land's market value.

III

Under the building residual technique, after determining the market value of the land, the expert determines the net operating income of the property. In this case, the primary factor in calculating the net operating income is the rent derived from the property.

In calculating the net operating income, the fair rental value, rather than the actual rent payable under an existing lease, must control. New Brunswick...