NOT FOR PUBLICATION WITHOUT APPROVAL OF THE TAX COURT COMMITTEE ON OPINIONS TAX COURT OF NEW JERSEY. February 23, 2016

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1 NOT FOR PUBLICATION WITHOUT APPROVAL OF THE TAX COURT COMMITTEE ON OPINIONS TAX COURT OF NEW JERSEY Mary Siobhan Brennan Judge 210 South Broad Street 5 th Floor Trenton, New Jersey (609) Fax: (609) February 23, 2016 Eileen Toll, Esquire Schneck Law Group 301 South Livingston Avenue Livingston, New Jersey Paul Tannenbaum, Esquire Zipp, Tannenbaum & Caccavelli, L.L.C. 280 Raritan Center Parkway Edison, New Jersey RE: Stone Brothers Secaucus, LLC v. Secaucus Town Docket No.: , , This constitutes the court s opinion after trial in the above-referenced matter. Plaintiff challenges Secaucus s assessment of its office and warehouse for tax years 2012, 2013, and The parties disputed the approach to valuation, the lease comparisons, and the calculation of the vacancy/credit loss, operating expenses and capitalization rate. For the reasons stated more fully below, the court affirms the assessments. *

2 I. Procedural History and Findings of Fact Stone Brothers Secaucus, LLC, owns the property located at 520 Secaucus Road, and designated as Block 58, Lot 3 on the tax map of Secaucus. For tax years 2012, 2013 and 2014, Secaucus assessed the property as follows: Land $1,878,300 Improvement $1,821,700 Total $3,700,000 The chart below sets forth the chapter 123 ratios and the plaintiff s and the defendant s conclusions of value for the three tax years in question Assessment $3,700,000 $3,700,000 $3,700,000 Ch. 123 Average $7,079, % Ch. 123 Low $8,329, % Ch. 123 High $6,156, % $7,145, % $8,407, % $6,213, % $6,935, % $8,158, % $6,030, % Pf. s True Mkt. Value $4,802,000 $4,746,000 $5,102,000 Df. s True Mkt. Value 8,244,420 8,400,220 8,400,220 Plaintiff filed timely Complaints in this court challenging the assessments. Defendant did not file counterclaims. At trial, each party called only one witness, a licensed real estate appraiser, and the parties stipulated to the experts qualifications. Trial took place over the course of two 2

3 days. The following findings of fact are based on the testimony of the witnesses at trial and from the evidence accepted into the record. A. Secaucus - Hudson County Hudson County is located on the east side of northern New Jersey across the Hudson River from New York City and is considered part of the New York Metropolitan Area. It is land-bordered by Bergen County to the north and water-bordered by Newark Bay and the Hackensack River to the west, Kill Van Kull to the south, and the Hudson River and Upper New York Bay to the east. Hudson County is the smallest county in New Jersey but one of the most densely populated in the United States. The 2010 U.S. Census Bureau population estimate was 634,266 with a population density of 13,495 people per square mile. Major roadways include the New Jersey Turnpike (I-95), Pulaski Skyway, Interstates 78 and 280, U.S. Routes 1 and 9, and New Jersey Routes 3, 7, 139, 185, 440 and 495. Bus and rail lines are readily accessible as is Newark Liberty International Airport and Port Newark-Elizabeth Marine Terminal. Secaucus encompasses approximately square miles in the eastern section of Hudson County known as the Meadowlands. It is located across the Hackensack River from Bergen County towns Carlstadt to the north, and East Rutherford, Rutherford, and Lyndhurst to the west, and Hudson County town Kearny to the south, and land borders Hudson County towns Jersey City to the southeast and North Bergen to the east. According to the 2010 United States Census Bureau, Secaucus had a population of 16,264, with a density of 2,793.7 per square mile. B. The Subject Property The property consists of 297,515 square feet or 6.83 acres on an irregularly shaped lot that fronts Secaucus Road on its north side. It is generally level and at grade with Secaucus Road and 3

4 rises as it moves to the rear. Significantly, it is not in a flood zone and is at the highest point in Secaucus. All utilities are available and in service. The property includes a one-story, masonry and steel industrial building originally constructed in 1960, consisting of 105,000 square feet of which 14,000 square feet is dedicated office space. The ceiling height is 16 feet with an 18 foot loading area. Positioned within the Light Industrial Zone 1, permitted uses are: (1) lumberyard; (2) public utility operations, substation or yard; (3) truck or tractor sales, repair and storage; (4) warehousing/wholesaling and retailing in conjunction thereof; and (5) printing and blueprinting. Plaintiff manufactures flooring tiles and the property lease is between related entities. The subject property is located in the center of the Meadowlands just off Route 3 and is situated between the NJ Turnpike and Manhattan. The location is amongst the Harmon Cove outlet centers. Both parties agree that there are few similar type properties for sale in that area and that the appropriate exposure time for this particular property is no greater than 12 months. 1 C. Plaintiff s Expert Appraiser Plaintiff s expert inspected the property on June 24, His expert appraisal report was admitted into evidence without objection and has an effective retrospective date of October 1, 2011, October 1, 2012, and October 1, The expert found the existing use to be the highest and best use of the property both as vacant and improved. The plaintiff s expert did not apply the cost approach to valuation or the sales comparison approach. According to his report, given the property type, the most probative valuation methodology was deemed the application of an income capitalization approach. To perform his analysis, the expert identified seven leases that he believed were comparable with the subject 1 Plaintiff s expert opined 9 to 12 months while defendant s expert opined 6 to 12 months. 4

5 property. He adjusted rental income per square foot based on time, location, quality, age/condition, size, ceiling height and office space. He did not determine whether any of the comparable leases were in flood zones nor did he research the effective tax rate of the comparable leases for properties outside of Secaucus. Using these seven comparable leases, the expert calculated an economic rental value of $4.75 per square foot and $498,750 2 total gross potential annual income. Plaintiff s expert calculated a 7% vacancy and credit loss. Based on his fifty years of experience and upon conversations with local real estate brokers and property managers, the expert calculated operating expenses to be as follows: 3% for management; 5% for commissions; 3% for reserves 3, and 1% for miscellaneous. His determination of net income for is as follows: Income: Rent: 105,000 sq = $498,750 Less Vacancy and credit Loss (7%) ( $34,913) Effective Gross Income $463,837 Expenses: Management (3%) ($13,915) Commission (5%) ($23,192) Reserves (3%) ($13,915) Miscellaneous (1%) ( $4,638) ($55,660) Net Income $408,177 To determine the appropriate capitalization rate, plaintiff s expert began with an analysis of data from the American Council of Life Insurance (ACLI). The ACLI database consists entirely 2 105,000 sq. ft. x $4.75 = $498,750 3 Both experts testified that the proper way to calculate reserves is with a numerical amount per square foot and not a percentage of income. For example, a new roof costs the same regardless of whether it is in a high rent or low rent district, and therefore would have vastly different percentage values. Their experience however is that the Tax Court usually finds reserves to be a percentage of effective gross income. 5

6 of top tier real estate investments known as Institutional Grade properties based on their location, physical condition, characteristics and design. The expert used year-end data from both the Mid- Atlantic geographical area and data for Industrial properties valued between $5 million and $14,999,000 (combined and weighted equally). The expert constructed a formula based on the debt coverage ratio and concluded an overall capitalization rate for Institutional Grade properties as follows: Date of Valuation Overall Capitalization Rate (%) October 1, October 1, October 1, Then, the expert adjusted these capitalization rates to take into account an adjustment for Non- Institutional properties. To accomplish this he used the PwC Real Estate Investor Survey data for the category National Warehouse. Considering this data as well as the subject property s age, location, and ceiling height, he applied a 50 basis point adjustment to the Overall Rate as follows: Date of Valuation Adjusted Overall Capitalization Rate (%) October 1, October 1, October 1, Additionally, he reviewed capitalization rates published by the Real Estate Research Corporation (RERC) for First Tier and Second Tier Warehouses in Northern New Jersey, which he believes support his capitalization rate. The plaintiff s expert s final conversion of income to value was: Date of Valuation October 1, 2011 $408,177 / 8.5% = $4,802,082 October 1, 2012 $408,177 / 8.6% = $4,746,244 October 1, 2013 $408,177 / 8.0% = $5,102,213 6

7 D. Defendant s Expert Appraiser Defendant s expert inspected the property in January His expert appraisal report was admitted into evidence without objection and has an effective retrospective date of October 1, 2011, October 1, 2012, and October 1, The expert found the existing use to be the highest and best use of the property both as vacant and improved. The defendant s expert applied both the sales comparison approach and the income capitalization approach. With regard to the sales approach, the expert identified four sales of similar properties in Bergen County municipalities with similar effective tax rates and one sale in Secaucus. After making adjustments for age/condition/quality, office space, and ceiling height, the expert concluded a price per square foot for all three years of $80.00 for a market value of $8,400,000 (105,000 x $80.00 = $8,400,000). When employing the income capitalization approach, the expert identified seven leases that he believed were comparable with the subject property. Four of the seven were for properties in Secaucus and the other three were for properties in Bergen County municipalities with similar effective tax rates. He adjusted rental income per square foot based on ceiling height only. Using these seven comparable leases, the expert calculated an economic rental value of $5.75 per square foot and $603,750 4 total gross potential annual income. The expert calculated a 5% vacancy and credit loss based on his review of the historical vacancy at the subject property, a survey of the local market, conversations with market participants, and a review of market studies. He stressed that Secaucus was highly valued for commercial real estate and is a market unto itself. He also reiterated that the subject property was 4 105,000 sq. ft. x $5.75 = $603,750 7

8 situated on the highest point in Secaucus and not in a flood zone, making it more desirable than most of the other properties in Secaucus and the Meadowlands. 5 Based on his experience and upon conversations with local real estate brokers and property managers, the expert calculated operating expenses to be as follows: 2.5% for management; 2.5 % leasing commissions; and 2% for reserves. His determination of net income for is as follows: Income: Expenses: Rent: 105,000 sq = $603,750 Less Vacancy and credit Loss (5%) ( $30,187) Effective Gross Income $573,563 Management (2.5%) ($14,339) Leasing (2.5%) ($14,339) Reserves (2%) ($11,471) (40,149) Net Operating Income $533,414 To determine the appropriate capitalization rate, defendant s expert also began with an analysis of data from the ACLI tables, however he used the third quarter figures for three subgroups National Industrial All, National Industrial $5 million to $14,999 million, and Mid- Atlantic Industrial. Additionally, he considered the Local Lending Community Range. Based on this analysis, the expert found a mortgage rate of 4.5% as of October 1, 2011, 4.25% as of October 1, 2012, and 4.25% as of October 1, According to defendant s expert s report, Hudson county covers about 60 square miles, approximately 25% of which is under water. Defendant s expert testified that the subject property is at the highest point of Secaucus and is not within the floodplain. Further, he testified that it is common for properties in the Meadowlands to be within the floodplain as the Meadowlands is almost entirely flat and at sea level. 8

9 After reviewing a compilation of rates of return for alternative investments such as municipal tax-exempt bonds, Treasury bills, U.S. Bonds and corporate bonds, the expert found an equity dividend rate of 6% sufficient to attract investors to this type of property. Defendant s expert calculated the capitalization rate as follows: 10/1/ /1/ /1/2013 Mortgage Rate 4.5% 4.25% 4.25% Loan to Value 70% 70% 70% Amortization (years) Mortgage Constant 6.67% 6.5% 6.5% Equity Rate 6.00% 6.00% 6.00% Mortgage Position (LTV x Mortgage Constant) 4.67% 4.55% 4.55% The Equity Position (Equity Position x Equity Rate) 1.80% 1.80% 1.80% Overall Rate (Mtg Position and Equity Position) 6.47% 6.35% 6.35% The expert s final conversion of income to value was: Date of Valuation October 1, 2011 $533,414 / 6.47% = $8,244,420 October 1, 2012 $533,414 / 6.35% = $8,400,220 October 1, 2013 $533,414 / 6.35% = $8,400,220 II. Conclusions of Law A. Presumption of Correctness The court s analysis begins with the well-established principle that [o]riginal assessments... are entitled to a presumption of validity. MSGW Real Estate Fund, LLC v. Borough of Mountain Lakes, 18 N.J. Tax 364, 373 (Tax 1998). As Judge Kuskin explained, our Supreme Court has defined the parameters of the presumption as follows: 9

10 The presumption attaches to the quantum of the tax assessment. Based on this presumption the appealing taxpayer has the burden of proving that the assessment is erroneous. The presumption in favor of the taxing authority can be rebutted only by cogent evidence, a proposition that has long been settled. The strength of the presumption is exemplified by the nature of the evidence that is required to overcome it. That evidence must be definite, positive and certain in quality and quantity to overcome the presumption. Ibid. (quoting Pantasote Co. v. City of Passaic, 100 N.J. 408, 413 (1985) (citations omitted)). The presumption of correctness arises from the view that in tax matters it is to be presumed that governmental authority has been exercised correctly and in accordance with law. Pantasote, supra, 100 N.J. at 413 (citing Powder Mill, I Assocs. v. Township of Hamilton, 3 N.J. Tax 439 (Tax 1981)); see also Township of Byram v. Western World, Inc., 111 N.J. 222 (1988). The presumption remains in place even if the municipality utilized a flawed valuation methodology, so long as the quantum of the assessment is not so far removed from the true value of the property or the method of assessment itself is so patently defective as to justify removal of the presumption of validity. Transcontinental Gas Pipe Line Corp. v. Township of Bernards, 111 N.J. 507, 517 (1988). The presumption of correctness... stands, until sufficient competent evidence to the contrary is adduced. Township Little Egg Harbor v. Bonsangue, 316 N.J. Super. 271, (App. Div. 1998) (citation omitted); City of Atlantic City v. Ace Gaming, LLC, 23 N.J. Tax 70, 98 (Tax 2006). In the absence of a R. 4:37-2(b) motion... the presumption of validity remains in the case through the close of all proofs. MSGW Real Estate Fund, LLC, supra, 18 N.J. Tax at 377. In making the determination of whether the presumption has been overcome, the court should weigh and analyze the evidence as if a motion for judgment at the close of all the evidence had been made pursuant to R. 4:40-1 (whether or not the defendant or plaintiff actually so moves), 10

11 employing the evidentiary standard applicable to such a motion. Ibid. The court must accept as true the proofs of the party challenging the assessment and accord that party all legitimate favorable inferences from that evidence. Id. at 376 (citing Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 535 (1995)). In order to overcome the presumption, the evidence must be sufficient to determine the value of the property under appeal, thereby establishing the existence of a debatable question as to the correctness of the assessment. West Colonial Enters, LLC v. City of East Orange, 20 N.J. Tax 576, 579 (Tax 2003) (quoting Lenal Props., Inc. v. City of Jersey City, 18 N.J. Tax 405, 408 (Tax 1999), certif. denied, 165 N.J. 488 (2000), aff d, 18 N.J. Tax 658 (App. Div. 2004)). Only after the presumption is overcome with sufficient evidence at the close of trial must the court appraise the testimony, make a determination of true value and fix the assessment. Rodwood Gardens, Inc. v. City of Summit, 188 N.J. Super. 34, (App. Div. 1982). If the court determines that sufficient evidence to overcome the presumption that the assessment is correct has not been produced, the assessment shall be affirmed and the court need not proceed to making an independent determination of value. Ford Motor Co. v. Township of Edison, 127 N.J. 290, 312 (1992); Global Terminal & Container Serv. v. City of Jersey City, 15 N.J. Tax 698, (App. Div. 1996). The court finds that plaintiff produced sufficient evidence to overcome the presumption of validity attached to the assessment. If taken as true, the opinion of plaintiff s expert and the facts upon which he relied create a debatable question regarding the correctness of the assessment in each of the tax years sufficient to allow the court to make an independent determination of the value of plaintiff s property. As noted above, plaintiff s expert opined, based on evidence he explained during trial, that the subject property was valued as follows: 11

12 Tax Year Plaintiff FMV Assessment Ratio Low High 2012 $4,802,000 3,700,000 7,079,985 8,329,581 6,156, $4,746,244 3,700,000 7,145,616 8,407,180 6,213, $5,102,213 3,700,000 6,935,333 8,158,765 6,030,970 If taken as true, the opinion of plaintiff s expert supports a conclusion that the property has been assessed in excess of its true market value and that plaintiff is entitled to relief. Of course, a finding that plaintiff has overcome the presumption of correctness does not equate to a finding that the assessment is erroneous. To the contrary, plaintiff s overcoming the presumption merely permits the court to address the question of what value should be accorded to the subject property. Once the presumption is overcome, the court must then turn to a consideration of the evidence adduced on behalf of both parties and conclude the matter based on a fair preponderance of the evidence. Ford Motor Co., supra, 127 N.J. at 312 (citations omitted). [A]lthough there may have been enough evidence to overcome the presumption of correctness at the close of plaintiff s case-in-chief, the burden of proof remain[s] on the taxpayer throughout the entire case... to demonstrate that the judgment under review [is] incorrect. Id. at (citing Pantasote, supra, 100 N.J. at 413). B. Highest and Best Use For property tax assessment purposes, property must be valued at its highest and best use. Ford Motor Co., supra, 127 N.J. at Any parcel of land should be examined for all possible uses and that use which will yield the highest return should be selected. Inmar Associates Inc. v. Township of Edison, 2 N.J. Tax 59, 64 (Tax 1980) (citing American Institute of Real Estate Appraisers, The Appraisal of Real Estate, (7 th ed. 1978)). Accordingly, the first step in the valuation process is the determination of the highest and best use for the subject property. 12

13 American Cyanamid Co. v. Township of Wayne, 17 N.J. Tax 542, 550 (Tax 1998), aff d, 19 N.J. Tax 46 (App. Div. 2000). The concept of highest and best use is not only fundamental to valuation but is a crucial determination of market value. This is why it is the first and most important step in the valuation process. Ford Motor Co. v. Township of Edison, 10 N.J. Tax 153, 161 (Tax 1988), aff d o.b. per curiam, 12 N.J. Tax 244 (App. Div. 1990), aff d, 127 N.J. 290, 604 A.2d 580 (1992) (citations omitted); see also Gen. Motors Corp. v. City of Linden, 22 N.J. Tax 95, 107 (2005). Here, with respect to the highest and best use the court accepts the parties position that the highest and best use is its current use. C. Valuation 1. Sales Approach Plaintiff s expert did not consider the sales comparison approach. Defendant s expert used this approach and identified five comparable sales. The court gives little weight to sales 1, 2, or 3 because they occurred on or before January 15, The sales are too old and, significantly, occurred prior to the drastic changes in the real estate market that occurred after October in Defendant s expert testified that the commercial market was stable in the Meadowlands area between 2009 and 2014 but he did not offer any market data in support of this testimony. Sale 5 occurred on September 16, 2014, almost a year after the 2014 valuation date, and concerned a property located in Moonachie, Bergen County. The one-story, 216,049 square foot warehouse had 9% office space, foot ceilings, and sold for $18,000,000. Because this property had higher ceilings than the subject property, the defendant s expert made a 5% adjustment reducing the price per square foot to $ In the court s opinion this adjustment is too low and should be 10%, resulting in an adjusted price per square foot of $75. At this rate, the 13

14 105,000 square foot subject property has a market value of $7,875,000 ($75 x 105,000 = $7,875,000). For Sale 5, given the property s size, location, ceiling height, and the fact that the sale occurred almost a year after the 2014 valuation date, the court considers Sale 5 for its corroborative value. The remaining Sale 4 occurred on December 20, 2011 and was for property located in Lyndhurst, Bergen County. Slightly larger than the subject property at 113,780 square feet, it is described as a one-story, warehouse building with 13% office space and 22 foot clear ceiling. It was constructed in 1960, is situated in the Meadowlands market, and sold for $9,750,000. The defendant s expert made a 5% adjustment for the higher ceiling resulting in an adjusted price per square foot of $ In the court s opinion this adjustment is too low and should be 10%, resulting in an adjusted price per square foot of $77. At this rate, the subject property s market value is $8,085,000. The court finds this to be a credible comparable sale. For the reasons set forth below, the court finds that the income capitalization approach is a more credible approach to value than the use of these two sales. 2. Income Approach In this case, both experts applied the income capitalization approach. It is well-settled that the valuation of income-producing properties is predominantly determined by using the preferred income capitalization approach. Parkview Village Ass n v. Borough of Collingswood, 62 N.J. 21, 23 (1972). Under the income approach, an appraiser analyzes a property s capacity to generate future benefits and capitalizes the income into an indication of present value. Appraisal Institute, The Appraisal of Real Estate 439 (14 th ed. 2013). The steps involve estimating the property s gross rental income, which should reflect the market rents, then deducting an allowance for vacancy and collection loss resulting in gross income. Thereafter, operational expenses are deducted leaving 14

15 net income which is capitalized to arrive at the property s value to an investor. See Lamm Assocs. v. Borough of West Caldwell, 1 N.J. Tax 373, 377 (Tax 1980). The court determines that the income approach is appropriate in this case. Calculation of value using the income approach can be summarized as follows: Total Potential Gross Income - Vacancy and Collection Losses Effective Gross Income - Operating Expenses Net Operating Income Capitalization Rate Value of Property See Spiegel v. Town of Harrison, 19 N.J. Tax 291, 295 (App. Div. 2001), aff g, 18 N.J. Tax 416 (Tax 1999); Appraisal Institute, The Appraisal of Real Estate 492 (14 th ed. 2013). A summary of plaintiff s expert s income approach analysis is as follows: Income: Rent: 105,000 sq = $498,750 Less Vacancy and credit Loss (7%) ($34,913) Effective Gross Income $463,837 Expenses: Management (3%) ($13,915) Commission (5%) ($23,192) Reserves (3%) ($13,915) Miscellaneous (1%) ($4,638) ($55,660) Net Income $408,177 A summary of defendant s expert s income approach analysis is as follows: 15

16 Income: Rent: 105,000 sq = $603,750 Less Vacancy and credit Loss (5%) ($30,187) Effective Gross Income $573,563 Expenses: Management (2.5%) ($14,339) Leasing (2.5%) ($14,339) Reserves (2%) ($11,471) (40,149) Net Operating Income $533,414 a. Potential Gross Income Because both parties agree on the square footage of the subject property, the first determination is potential gross income based on market rent. Central to an income analysis is the determination of the economic rent, also known as the market rent or fair rental value. Parkway Village, supra, 108 N.J. at 270. Market rent is defined as [t]he most probable rent that a property should bring in a competitive and open market reflecting all conditions and restrictions of the typical lease agreement. The Appraisal of Real Estate, supra, at 453. The parties first determine the total potential gross income attributable to the subject at full occupancy. Id. at 457. Checking actual income to determine whether it reflects economic income is a process of sound appraisal judgment applied to rentals currently being charged for comparable facilities in the competitive area. West Colonial Enters. L.L.C., supra, 20 N.J. Tax at 583 (citations and internal quotation marks omitted). In other words, the first step is to calculate the market rent that would be realized if the property was rented at full capacity, and this is accomplished by comparing reliable market rents of comparable properties. With respect to the determination of market rent, the court finds that both expert witnesses provided comparable rentals requiring subjective adjustments, and there is a sufficient sampling 16

17 of comparable rentals from which the court can determine market rent. With respect to valuation evidence, this court has stated the following: The Tax Court should determine value from the evidence submitted, based upon the Tax Court s knowledge and expertise. The Tax Court has not only the right, but the duty to apply its own judgment to valuation data submitted by experts in order to arrive at a true value and find an assessment for the years in question. Glenn Wall Assoc., supra, 99 N.J. at 280 (quoting New Cumberland Corp v. Borough of Roselle, 3 N.J. Tax 345, 353 (Tax 1981)). Therefore, this court is not bound to accept an expert witness s opinion in toto. An expert s opinion may be adopted in whole or in part or completely rejected. See Borough of Middlesex v. Clearwater Village, Inc., 163 N.J. Super 166, 174 (App. Div. 1978), certif. denied, 79 N.J. 483 (1979). In arriving at potential gross income, plaintiff s expert and defendant s expert each used seven different sales to calculate market rent. Considering relevant factors such as time, location (including effective tax rate and flood zones), the use of Hartz Mountain leases, the amount of office space, and ceiling height, the court accepts plaintiff s comparable leases 1, 4, 5, 6, and 7 and defendant s comparable leases 3, 4, and 5. Using these comparable leases the court finds that the average price per square foot is $5.12 and the gross potential income is $557,600. b. Vacancy and Credit Loss Plaintiff s expert offers a vacancy rate of 7%. In support of this rate, the expert cited the following data: Research Service, Category CassidyTurley, Meadowlands Colliers, International Northern NJ CoStar, Secaucus/North Bergen Industrial % (4 th Qtr) 6.2% (4 th Qtr) 8.5% (4 th Qtr.) 8.1% (4 th Qtr.) 7.4% (4 th Qtr.) 13.2% (year-end) 10.2% (year-end) 7.4% (year-end) 17

18 Cushman & Wakefield, Hudson Jones Lang LaSalle, Meadowlands 8.5% 9.9% 9.5% 13.7% (3 rd Qtr) 9.7% (3 rd Qtr) 7.2% (3 rd Qtr) The plaintiff s expert also considered that the data were not specific to Secaucus, which is a market that is superior in quality, and therefore he adjusted down to a 7% vacancy rate. The defendant s expert utilized a stabilized vacancy factor of 5%, based on the history of the subject property, a survey of the local market, his conversations with market participants, and his review of unidentified market studies. He based his opinion primarily on his knowledge of the Meadowlands market, which, as both experts agree, is superior to surrounding markets. Defendant s expert, however, failed to provide the whys and wherefores to support his stabilized vacancy factor. See Greenblatt v. City of Englewood, 26 N.J. Tax 41 (Tax 2010). From all of the evidence adduced at trial, the court finds that a 7% vacancy rate is reasonable for the subject property for tax years 2012, 2013, and A vacancy and credit loss rate must be predicated on an estimate of the long-term quality and durability of the rental income stream. University Plaza Realty Corp v. City of Hackensack, 12 N.J. Tax 354, 369 (Tax 1992), aff d, 264 N.J. Super 353 (App. Div.), certif. denied, 134 N.J. 481 (1993). c. Operating Expenses Operating Expenses are periodic expenditures necessary to maintain the property and continue the anticipated income flow, assuming prudent and competent management. In the this matter, market rent is predicated on a net basis with the tenant responsible for all operating expenses with the exception of management, commissions/leasing, capital improvement reserves and other miscellaneous expenses such as legal and accounting expenses. Plaintiff s expert calculated operating expenses as follows: 18

19 Management 3% Commission 5% Reserves 3% Miscellaneous 1% His expense figures were primarily derived from conversations with brokers, property managers, investors and developers, as well as his own personal experience. He did not provide any market data to support his calculations. Defendant s expert calculated expenses as follows: Management 2.5% Leasing 2.5% Reserves 2.0% His expense figures were primarily derived from conversations with brokers, property managers, investors and developers, as well as his own personal experience. Once again referencing Secaucus s superior location, he testified that many lease terms are negotiable, including leasing commissions, and that many transactions take place without a broker s involvement. He factored this understanding into his opinion on expenses. In addition, he provided supporting market data from PriceWaterhouseCoopers s Real Estate Investor Survey: PwC Survey Category First Quarter 2012 First Quarter 2013 Management Fees National Warehouse Leasing Commissions National Warehouse Renewal Leases National Warehouse 1.50% (Low) 4.00% (High) 2.64% (Average) 3.00% (Low) 8.00% (High) 5.59% (Average) 1.50% (Low) 7.50% (High) 3.27% (Average) 1.50% (Low) 4.00% (High) 2.68% (Average) 3.00% (Low) 8.00% (High) 5.45% (Average) 1.50% (Low) 7.50% (High) 3.16% (Average 19

20 Replacement Reserves (per sq. ft.) National Warehouse $.05 -$.35 Average $.16 $.05 -$.35 Average $.16 Based on a review of the evidence in the record, the court concludes that a management expense of 3%, a commission expense of 4.5%, and a reserve expense of 3% are reasonable. d. Capitalization Rate The overall capitalization rate is [a]n income rate for a total real property interest that reflects the relationship between a single year s net operating income expectancy and the total property price or value. Appraisal Institute, The Appraisal of Real Estate 493 (14 th ed. 2013). The overall capitalization rate is used to convert net operating income into an indication of overall property value. TD Bank v. City of Hackensack, 28 N.J. Tax 363, 400 (Tax 2015) (quoting Appraisal Institute, The Appraisal of Real Estate 462 (13 th ed. 2008)). Plaintiff s expert relied on the Band of Investment technique for calculating an overall capitalization rate. This technique is a form of direct capitalization which is used to convert a single year s income estimate into a value indication. The technique includes both a mortgage and an equity component. Hull Junction Holding Corp. v. Borough of Princeton, 16 N.J. Tax. 68, (Tax 1996) (quoting Appraisal Institute, Appraisal of Real Estate 467 (10 th ed. 1992)). 20 Because most properties are purchased with debt and equity capital, the overall capitalization rate must satisfy the market return requirements of both investment positions. Lenders must anticipate receiving a competitive interest rate commensurate with the perceived risk of the investment or they will not make funds available. Lenders generally require that the loan principal be repaid through periodic amortization payments. Similarly equity investors must anticipate receiving a competitive equity return (i.e. equity capitalization rate) commensurate with the perceived risk, or they will invest their funds elsewhere.

21 Appraisal Institute, Appraisal of Real Estate 495 (14 th ed. 2013). [I]n using the Band of Investment technique, it is incumbent upon the appraiser to support the various components of the capitalization rate analysis by furnishing reliable market data... to the court as the basis for the expert s opinion so that the court may evaluate the opinion. Hull Junction Holding, supra, 16 N.J. Tax at 82 (second alteration in original) (quoting Glen Wall Assocs. v. Township of Wall, 99 N.J. 265, (1985)). For these purposes, the Tax Court has accepted, and the Supreme Court has sanctioned, the use of data collected and published by the American Council of Life Insurance. Id. at (citations omitted). Relevant data is also collected and published by The Appraisal Institute, Real Estate Research Corporation and Korpacz Real Estate Investor Survey. Id. at 83. By analyzing this data in toto, the court can make a reasoned determination as to the accuracy and reliability of the mortgage interest rates, mortgage constants, loan-to-value ratios, and equity dividend rates used by the appraisers. Ibid. In his analysis and selection of data to use for the Overall Capitalization Rate, plaintiff s expert selected ACLI year-ending data instead of third quarter data due to sample size. He also considered the subject property to be a non-institutional grade building and constructed a formula for determining the overall rate by use of a debt coverage ratio. The defendant s expert developed a capitalization rate using ACLI third quarter data. He considered the subject property to be institutional grade with a very low level of risk due to location. The court finds that defendant s expert presented a reasonable opinion of the appropriate capitalization rate. Therefore, the court determines that the rates proposed by defendant s expert are credible. Defendant s expert utilized tables by the ACLI for the third quarter of 2011, 2012, and Data was also extracted from PriceWaterhouseCoopers s Real Estate Investor Survey and various economic indicators. Based on the data submitted by the expert, the court finds that 21

22 the figures propounded by defendant s expert are well-supported by the record and commensurate with the rate of risk to attract investors. III. Valuation Summary and Conclusion The following table summarizes the court s conclusions, utilizing only the income approach to valuation, discussed above: Tax Year 2012: 105,000 square $ 5.12/ sq. ft. $537,600 Potential Gross Income $537,600 Less: Vacancy and Credit Loss (7%) ($37,632) Effective Gross Income ( EGI ) $499,968 Less: Operating Expenses (10.5%) ($52,496) Net Operating Income $447,472 Divided by Capitalization Rate = 6.47% $6,916,105 Value (rounded) $6,900,000 Pursuant to N.J.S.A. 54:51A-6a, in a non-revaluation year an assessment must be reduced when the ratio of the assessed value of the property to its true value exceeds the upper limit of the common level range. The common level range is defined by N.J.S.A. 54:1-35a(b) as that range which is plus or minus 15% of the average ratio for the municipality in which the subject property is located. The formula for determining the subject property s ratio is: Assessment divided by True Value = Ratio. The ratio for the subject property in tax year 2012, therefore, is determined as follows: $3,700,000 $ 6,900,000 =.5362 % The chapter 123 ratio for Secaucus in tax year 2012 was.5226 with an upper limit of.6010 and a lower limit of The ratio for the subject property is within the common level range. 22

23 Tax Year 2013 and 2014: 105,000 square $ 5.12/ sq. ft. $537,600 Potential Gross Income $537,600 Less: Vacancy and Credit Loss (7%) ($37,632) Effective Gross Income ( EGI ) $499,968 Less: Operating Expenses (10.5%) ($52,496) Net Operating Income $447,472 Divided by Capitalization Rate = 6.35% $7,046,803 Value (rounded) $7,047,000 The ratio for the subject property in tax year 2012, therefore, is determined as follows: $3,700,000 $7,047,000 =.525 % The chapter 123 ratio for Secaucus in tax year 2013 was.5178 with an upper limit of.5955 and a lower limit of The ratio for the subject property for tax year 2013 is within the common level range. The chapter 123 ratio for Secaucus in tax year 2014 was.5335 with an upper limit of.6135 and a lower limit of The ratio for the subject property for tax year 2014 is within the common level range. Judgments affirming the assessments for the subject property for tax years 2012, 2013 and 2014 will be entered by the court. Very truly yours, /s/ Mary Siobhan Brennan Mary Siobhan Brennan, J.T.C. 23