Merrill Creek Reservoir v. Harmony Twp.

• Decision Date: 22 August 2019
• Docket Number: A-1509-16T3,A-1500-16T3,DOCKET NOS. A-1498-16T3
• Citation: 461 N.J.Super. 32,218 A.3d 327
• Parties: MERRILL CREEK RESERVOIR c/o Project Direct, Plaintiff-Appellant/Cross-Respondent, v. HARMONY TOWNSHIP, Defendant-Respondent/Cross-Appellant.
• Court: New Jersey Superior Court — Appellate Division

461 N.J.Super. 32

218 A.3d 327

MERRILL CREEK RESERVOIR c/o Project Direct, Plaintiff-Appellant/Cross-Respondent,

v.HARMONY TOWNSHIP, Defendant-Respondent/Cross-Appellant.

DOCKET NOS. A-1498-16T3

A-1500-16T3

A-1509-16T3

Superior Court of New Jersey, Appellate Division.

Argued January 16, 2019

Decided August 22, 2019

Frank E. Ferruggia, Newark, argued the cause for appellant/cross-respondent (McCarter & English LLP, attorneys; Frank E. Ferruggia, of counsel and on the briefs; Farhan Ali, Newark, on the briefs).

Lawrence P. Cohen, Hackettstown, argued the cause for respondent/cross-appellant (Lavery Selvaggi Abromitis & Cohen, attorneys; Lawrence P. Cohen, of counsel and on the briefs; William Henry Pandos, Hackettstown, on the briefs).

Thomas J. Denitzio, Jr., Iselin, argued the cause for amicus curiae Royal Institute of Chartered Surveyors (Greenbaum Rowe Smith & Davis, LLP, attorneys; Thomas J. Denitzio, Jr., of counsel and on the brief; Emily A. Kaller, Iselin, on the brief).

Before Judges Fuentes, Accurso and Vernoia.

The opinion of the court was delivered by

ACCURSO, J.A.D.

In these consolidated appeals, plaintiff Merrill Creek Reservoir c/o Project Direct, a consortium of electric utility companies and owner of the Merrill Creek Reservoir in Harmony Township, challenges three 2016 Tax Court judgments affirming the 2011-2013 tax assessments on its property. Harmony cross-appeals alleging error in adjustments the Tax Court made to value. Merrill Creek, although conceding the improvements should be valued using the cost approach the Tax Court employed, argues the court erred in accepting the Township's trend analysis, which it characterizes as "a rarely used valuation methodology, discredited by New Jersey Tax Court precedent," instead of its own quantity survey method. Because we find no error in the court's acceptance of a trend analysis in this case or its adjustments to value based on the evidence adduced at trial, we affirm.

The case was tried over the course of seven days. Certain facts are undisputed. The reservoir property consists of ten parcels totaling 840 acres in Harmony. The reservoir, which has a capacity of over sixteen billion gallons of fresh water, spans 650 acres. The remainder of the property not vacant land contains major improvements including a main dam, several smaller saddle dikes, a spillway, a conservation outlet, pipes and tunnels to transfer the water, a pumping station, an electric substation, an inlet/outlet tower containing equipment to regulate water flow, a maintenance building and a visitor center.

The reservoir was constructed between 1985 and 1988 following a directive from the Delaware River Basin Commission. It was designed to provide fresh water to offset consumptive use by electric power plants located along the Delaware River during droughts. The reservoir is part of a larger network of reservoirs that serve the Delaware by providing water in times of drought and low flow conditions. Although the reservoir makes regular releases of water for conservation purposes, there have been only four ordered large-scale releases to counter drought conditions since construction was completed in 1988.

Construction of the reservoir was led and supervised by Public Service Electric and Gas Company (PSE & G), one of the members of the owning consortium, acting on its behalf as the "managing utility." The sole fact witness at trial was Robert Uniszkiewicz, manager of construction estimating for PSE & G, and a thirty-four-year employee of the company. He manages a group of civil, electrical and mechanical estimators responsible for estimating construction-related costs for all PSE & G projects. Uniszkiewicz was tasked by PSE & G to estimate the costs of building the Merrill Creek Reservoir.

The parties stipulated the highest and best use of the property is as a reservoir, and that the cost approach is the appropriate method for valuing the improvements. They also stipulated the fair market value of the land for tax years 2011 through 2013 was $4,800,000. They stipulated to the qualifications of all experts testifying at trial and to the admission of their reports. Finally, they agreed the total assessment of the property was $220,822,300 for tax years 2011 and 2012, and $220,725,800 for 2013.

Each side presented a real estate appraisal expert and an expert who estimated costs of construction of the improvements. The parties and their experts having agreed that the cost approach was the best indicator of fair value for this special purpose property, see Dworman v. Borough of Tinton Falls, 1 N.J. Tax 445, 452 (Tax 1980), aff'd, 180 N.J. Super. 366, 3 N.J.Tax 1, 434 A.2d 1134 (App. Div. 1981), the focus of the expert testimony at trial was on their differing methods for calculating the cost of reproducing or replacing the reservoir and its attendant improvements, see Int'l Flavors & Fragrances, Inc. v. Union Beach Borough, 21 N.J. Tax 403, 417 (Tax 2004) (explaining the two elements to a cost approach as "land value and the reproduction or replacement cost of the buildings and other improvements").

Merrill Creek's experts employed the quantity survey method, described in The Appraisal of Real Estate as "[t]he most comprehensive method of cost estimating." Lawrence Assocs. v. Lawrence Twp., 5 N.J. Tax 481, 526 (Tax 1983) (quoting American Institute of Real Estate Appraisers, The Appraisal of Real Estate 216 (7th ed. 1978)).

In its strictest application, it is a repetition of the contractor's original process of developing a bid figure. A quantity survey is computation of the quantity and quality of all materials used and of all categories of labor hours required, to which unit cost figures are applied to arrive at a total cost estimate for materials and labor. To this are added estimates for other contractor costs such as permits, insurance, equipment rental, field office, supervision, and other overhead, plus a margin for profit.

[ Ibid. (quoting The Appraisal of Real Estate 216-17 (7th ed.)).]

Joseph Novelli, Merrill Creek's expert construction cost estimator, testified as to how he prepared an estimate of the cost to reproduce new the reservoir improvements less depreciation for the tax years at issue. See Gale & Kitson Fredon Golf, L.L.C. v. Twp. of Fredon, 26 N.J. Tax 268, 283 (Tax. 2011) (explaining the cost approach involves "a replication, through the use of widely accepted cost services ... of the cost of the components of the building to be valued, less ... depreciation" (quotation omitted)).

Visiting the site, inspecting the improvements and using the "as-built" drawings, he performed a "quantity takeoff" by identifying the materials used to construct each component of all improvements, calculating dimensions where necessary, and estimating the quantities used in construction. He then consulted the RSMeans Manual, a nationally recognized publication that provides construction cost surveys relied upon by appraisers and cost estimators, to ascertain the cost of each item. Novelli testified he multiplied the quantity of each material by its code in the RSMeans manual. He applied time and location modifiers and the RSMeans software provided him the total cost for each component including labor at union rates. For the few items without an RSMeans code, he consulted the Marshall and Swift Valuation Service, another widely accepted building cost manual, see Ford Motor Co. v. Edison Twp., 10 N.J. Tax 153, 181 (Tax 1988), aff'd, 127 N.J. 290, 604 A.2d 580 (1992), called suppliers or vendors or estimated the cost based on his own experience.

After costing out every component on the as-built plans using the quantity survey method, Novelli summed them to obtain total "hard" costs, representing material and labor, for each tax year. To those amounts, he added a five percent contingency to account for extra work due to unforeseen conditions or changes, ten percent for general conditions, and ten percent for general contractor overhead and profit. Novelli then added 14.25 percent in "soft" costs, consisting of items such as architectural fees, engineering fees, insurance and legal fees. Novelli testified he found total hard and soft costs of $192,370,411 for tax year 2011; $202,214,888 for tax year 2012; and $200,301,947 for tax year 2013.

Finally, Novelli deducted depreciation from each component using the "age-life" method. See Brockway Glass Co. v. Twp. of Freehold, 10 N.J. Tax 356, 367 (Tax 1989) (explaining "in the cost approach, depreciation from all causes is subtracted from the cost of reproduction new as representing a loss in property value"), aff'd, 12 N.J. Tax 263 (App. Div. 1991). He first determined the estimated useful life for each component and divided it by its effective age to derive a depreciation factor, which he applied to reduce the cost of the component. Novelli found final depreciated hard and soft costs of $128,962,021 for tax year 2011; $132,888,329 for tax year 2012; and $128,632,204 for tax year 2013.

Mark Sussman, Merrill Creek's real estate appraisal expert used Novelli's cost estimates as the basis for his proposed valuation of the property. Sussman worked with Novelli in developing the component-based depreciation analysis Novelli applied to determine depreciated hard and soft costs for each tax year. Sussman further reduced the value of the improvements by fifteen percent for functional obsolescence, reasoning that a reservoir of substantially less capacity would have been sufficient in light of the limited number of times the Delaware River Basin Commission has ordered the release of water into the river. See CPC Int'l, Inc. v. Englewood Cliffs, 193 N.J. Super. 261, 265, 473 A.2d 548 (App. Div. 1984) (explaining functional obsolescence as a term to describe the reduction of an improvement's market value based on costly features installed to please the owner or unique to the improvement's special purpose that do not enhance market value).

Sussman considered and rejected...