Main Union Associates v. Little Falls Township

TAX COURT OF NEW JERSEY

Joshua D. Novin Washington & Court Streets, 1st Fl.
Judge P.O. Box 910
Morristown, New Jersey 07963
Tel: (609) 815-2922, Ext. 54680
Fax: (973) 656-4305

NOT FOR PUBLICATION WITHOUT THE APPROVAL
OF THE TAX COURT COMMITTEE ON OPINIONS

June 29, 2017

Barry J. Cohen, Esq.
Amster & Rosensweig, P.C.
33 Harrison Avenue
P.O. Box 1
Waldwick, New Jersey 07463

William R. Betesh, Esq.
Boggia & Boggia, L.L.C.
71 Mt. Vernon Street
Ridgefield Park, New Jersey 07660

Re: Main Union Associates v. Little Falls Township
Docket Nos. 003613-2014, 006726-2015, and 004938-2016

Dear Mr. Cohen and Mr. Betesh:

This letter constitutes the court’s opinion following trial of the local property tax appeals

in the above-referenced matters. Main Union Associates (“plaintiff” or “Main Union”) challenges

the 2014, 2015, and 2016 local property tax assessments on an improved parcel of real property

located in the Township of Little Falls (“defendant”), County of Passaic and State of New Jersey.

For the reasons stated more fully below, the court affirms the 2014, 2015, and 2016 tax

year assessments.

I. Procedural History and Findings of Fact

As of the valuation dates, Main Union was the owner of the real property and improvements

located at 195-203 Main Street, 32-42, 36, 44-46, and 48-54 Union Avenue, Little Falls, New

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Jersey. The property is identified on the tax map of Little Falls Township as Block 92, Lot 5 (the

“subject property”). For the 2014, 2015, and 2016 tax years, the subject property was assessed as

follows:

Land: $1,560,000
Improvement: $3,200,000
Total: $4,760,000

The average ratio of assessed to true value, commonly referred to as the Chapter 123 ratio, for

Little Falls Township was 89.82% for the 2014 tax year, 90.34% for the 2015 tax year, and 90.80%

for the 2016 tax year. See N.J.S.A. 54:1-35a(a). When the average ratio is applied to the local

property tax assessment, the implied equalized value of the subject property is: $5,299,487.80 for

the 2014 tax year; $5,268,983.80 for the 2015 tax year; and $5,242,290.70 for the 2016 tax year.

The subject property is a 2.53 acre, irregularly shaped, rectangular parcel located at the

southeast corner of the intersection of Main Street and Union Avenue in Little Falls Township.

Vehicular access to the property is provided from Union Avenue. The subject property occupies

a very good location, in close proximity to the Little Falls train station, and with reasonable access

to interstate and state highways.

The subject property is improved with a well-maintained 52-unit brick garden apartment

complex. One of the 52 apartment units is occupied by a resident superintendent, who is afforded

“free” rent for superintendent services. The complex consists of 48 one-bedroom units and 4 two-

bedroom units. The buildings were constructed approximately in 1965, and consist of seven two-

story buildings organized in four separate sections. Each building contains either a full or partial

basement for tenant storage. The apartment complex contains an on-site management office,

located in the basement of one of the buildings. Two of the buildings contain laundry areas for

tenant use. Each apartment is heated by a central-gas-fired boiler with a baseboard hot water

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heating system. Air conditioning is supplied by individual wall units. The landlord furnishes each

apartment with one air conditioning unit, an oven/range, and refrigerator. Each apartment has a

three-fixture bathroom. As the apartments are vacated, plaintiff performs updating of the

appliances and fixtures on an “as needed” basis. Evidence was offered during trial that a few units

have been completely renovated with new kitchen cabinets, new countertops, and stainless steel

appliances. However, conflicting testimony was presented during trial regarding exactly how

many apartments were updated. Approximately one-half of the apartments contain new bathroom

plumbing fixtures.

In addition to owning the subject property, plaintiff and/or its principals also own an 80-

unit apartment complex located diagonally across Main Street from the subject property, known

as The Brownstone. The superintendent for Main Union also serves as superintendent for The

Brownstone, rendering services to The Brownstone’s tenants. Furthermore, the on-site

management office for the subject property serves as management office for The Brownstone.

However, the employees staffing the on-site management office are employees of The Brownstone

complex, and not employees of Main Union. Thus, according to plaintiff’s appraiser, Main

Union’s expense statements for the 2013, 2014, and 2015 calendar years reflect a payroll

reimbursement to The Brownstone, representing approximately forty percent of the total payroll

obligations. The forty percent represents a fraction, the numerator of which is the number of

apartment units in Main Union and the denominator of which is the total number of apartment

units in both the Main Union and The Brownstone complexes (52/132 = 39.39%).

As of all the valuation dates involved herein, Little Falls Township had enacted a rent

control ordinance, known as Chapter 178, which was applicable to the subject property. Chapter

178 limits the rent increase a landlord may charge for “housing space” to a percentage of the

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consumer price index. Moreover, Chapter 178 provides that when “housing space covered by this

chapter shall be vacated by the tenant, the landlord may establish a new base rent.” Thus, when

an apartment unit is vacated, Chapter 178 contains a vacancy-decontrol provision thereby

permitting the landlord to charge a new decontrolled base rent.

The subject property is located in the R-2 Residential Garden Apartment zoning district

with permitted uses that include multi-family structures and accessory buildings. The R-2 zoning

district requires a minimum lot size of ten acres. As the subject property contains 2.53 acres, the

use of the subject property as an apartment complex is considered a legally permitted non-

conforming use. The subject property is located in the X Flood Hazard Zone, denoting an area of

minimal flooding risk.

Plaintiff timely filed Complaints directly with the court challenging the 2014, 2015, and

2016 tax year assessments on the subject property. Defendant timely filed Counterclaims with the

court asserting that the 2014, 2015, and 2016 tax year assessments on the subject property were

less than its true value. The matters were tried to conclusion over a two-day period.

During trial, plaintiff and defendant each offered testimony from a State of New Jersey

certified general real estate appraiser, who were accepted by the court, without objection, as

experts in the field of property valuation. Each appraiser prepared an appraisal report expressing

an opinion of the true market value of the subject property as of the October 1, 2013, October 1,

2014, and October 1, 2015 valuation dates.

The appraisers offered their opinions that the subject property had a true market value as

follows:

10/1/2013 10/1/2014 10/1/2015
Plaintiff’s appraiser $3,701,500 $3,917,100 $3,955,900
Defendant’s appraiser $5,270,000 $5,270,000 $5,350,000

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II. Conclusions of Law

a. Presumption of Validity

“Original assessments and judgments of county boards of taxation 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). “Based on this presumption, the appealing taxpayer has the burden of

proving that the assessment is erroneous.” Pantasote Co. v. City of Passaic, 100 N.J. 408, 413

(1985) (citing Riverview Gardens v. North Arlington Borough, 9 N.J. 167, 174 (1952)). “The

presumption of correctness. . . stands, until sufficient competent evidence to the contrary is

adduced.” Little Egg Harbor Township v. Bonsangue, 316 N.J. Super. 271, 285-86 (App. Div.

1998). A taxpayer can only rebut the presumption by introducing “cogent evidence” of true value.

That is, evidence “definite, positive and certain in quality and quantity to overcome the

presumption.” Aetna Life Ins. Co. v. Newark City, 10 N.J. 99, 105 (1952). Thus, at the close of

plaintiff’s proofs, the court must be presented with evidence that raises a “debatable question as to

the validity of the assessment.” MSGW Real Estate Fund, LLC, supra, 18 N.J. Tax at 376.

In evaluating whether the evidence presented meets the “cogent evidence” standard, the

court “must accept such evidence as true and accord the plaintiff all legitimate inferences which

can be deduced from the evidence.” Id. at 376 (citing Brill v. Guardian Life Insurance Co. of

America, 142 N.J. 520 (1995)). The evidence presented, when viewed under the Brill standard

“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 Properties, Inc. v.

City of Jersey City, 18 N.J. Tax 405, 408 (Tax 1999), aff’d, 18 N.J. Tax 658 (App. Div. 2000),

certif. denied, 165 N.J. 488 (2000)). “Only after the presumption is overcome with sufficient

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evidence. . . must the court ‘appraise the testimony, make a determination of true value and fix the

assessment.’” Greenblatt v. Englewood City, 26 N.J. Tax 41, 52 (Tax 2011) (quoting Rodwood

Gardens, Inc. v. City of Summit, 188 N.J. Super. 34, 38-39 (App. Div. 1982)). Hence, even in the

absence of a motion to dismiss under R. 4:37-2(b), the court is nonetheless required to determine

if the plaintiff has overcome the presumption of validity. If the court independently concludes that

plaintiff has not carried the requisite burden, dismissal of the action is warranted under R. 4:40-1

and the trial court need not engage in an evaluation of the evidence to make an independent

determination of value.

According plaintiff all reasonable and legitimate inferences which can be deduced from

the evidence presented, the court concludes that plaintiff produced cogent evidence sufficient to

overcome the presumption of validity. If accepted as true, the opinions of plaintiff’s appraiser and

the facts upon which he relied raise debatable questions regarding the correctness of the local

property tax assessment on the subject property for the 2014, 2015, and 2016 tax years.

However, concluding that the presumption of validity has been overcome does not equate

to a finding by the court that a local property tax assessment is erroneous. Once the presumption

has been 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. v. Township of Edison, 127 N.J. 290, 312 (1992). The court must be mindful that “although

there may have been enough evidence [presented] to overcome the presumption of correctness at

the close of plaintiff’s case-in-chief, the burden of proof remain[s] on the taxpayer. . . to

demonstrate that the judgment [or local property tax assessment] under review was incorrect.” Id.

at 314-15 (citing Pantasote Co., supra, 100 N.J. at 413).

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b. Highest and Best Use

In the court’s pursuit to determine the true market value of the subject property,

consideration must be given to that price which a hypothetical buyer would pay a hypothetical

seller, neither of which are constrained to purchase or sell the property, as of October 1 of the

pretax year. See Petrizzo v. Edgewater, 2 N.J. Tax 197, 200 (Tax 1981); Genola Ventures v.

Shrewsbury Bor., 2 N.J. Tax 541, 551 (Tax 1981). An indispensable element to the process of

property valuation and to the determination of a property’s true market value is discerning its

highest and best use. Ford Motor Co. v. Township of Edison, 10 N.J. Tax 153, 161 (Tax 1988),

aff’d o.b., 12 N.J. Tax 244 (App. Div. 1990), aff’d, 127 N.J. 290 (1992). See also General Motors

Corp. v. City of Linden, 22 N.J. Tax 95, 107 (Tax 2005). “For local property tax assessment

purposes, property must be valued at its highest and best use.” Entenmann's Inc. v. Totowa

Borough, 18 N.J. Tax 540, 545 (Tax 2000). Thus, the highest and best use analysis is often referred

to as “the first and most important step in the valuation process.” Ford Motor Co., supra, 10 N.J.

Tax at 161.

The phrase highest and best use is defined as follows:

The reasonably probable and legal use of vacant land or an improved
property that is physically possible, appropriately supported,
financially feasible, and that results in the highest value. . .
Alternatively, the probable use of land or improved property –
specific with respect to the user and timing of the use – that is
adequately supported and results in the highest present value.

[Appraisal Institute, The Dictionary of Real Estate Appraisal (5th ed.
2010).]

Thus, the highest and best use analysis comprises the “sequential consideration of the

following four criteria, determining whether the use of the subject property is: 1) legally

permissible; 2) physically possible; 3) financially feasible; and 4) maximally productive.”

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Clemente v. Township of South Hackensack, 27 N.J. Tax 255, 267-269 (Tax 2013), aff’d, 28 N.J.

Tax 337 (App. Div. 2015). See also County of Monmouth v. Hilton, 334 N.J. Super. 582, 588

(App. Div. 2000).

Here, after consideration of the highest and best use criteria, both plaintiff’s appraiser and

defendant’s appraiser concluded that the highest and best use of the subject property, as vacant, is

for multi-family residential development in accordance with the R-2 Residential Garden

Apartment District zoning regulations. Moreover, after giving consideration to all legally

permitted, physically possible, financially feasible, and maximally productive alternate uses, both

plaintiff’s appraiser and defendant’s appraiser concluded that the highest and best use of the subject

property, as improved, was the existing use as a 52-unit apartment complex.

The court finds that the highest and best use conclusions of both appraisers are supported

by the trial record. Accordingly, the court determines that the highest and best use of the subject

property, as if vacant, and as improved, is the existing use of the subject property as a 52-unit

apartment complex.

c. Methodology

“There is no single determinative approach to the valuation of real property.” 125 Monitor

Street LLC v. City of Jersey City, 21 N.J. Tax 232, 237-238 (Tax 2004) (citing Samuel Hird &

Sons, Inc. v. City of Garfield, 87 N.J. Super. 65, 72 (App. Div. 1965)); ITT Continental Baking

Co. v. East Brunswick Township, 1 N.J. Tax 244, 251 (Tax 1980). “There are three traditional

appraisal methods utilized to predict what a willing buyer would pay a willing seller on a given

date, applicable to different types of properties: the comparable sales method, capitalization of

income and cost.” Brown v. Borough of Glen Rock, 19 N.J. Tax 366, 376 (App. Div. 2001) (citing

Appraisal Institute, The Appraisal of Real Estate 81 (11th ed. 1996), certif. denied, 168 N.J. 291

8
(2001)). The “decision as to which valuation approach should predominate depends upon the facts

of the particular case and the reaction to these facts by the experts.” Coca-Cola Bottling Co. of

New York v. Neptune Township, 8 N.J. Tax 169, 176 (Tax 1986) (citing New Brunswick v. Tax

Appeals Div., 39 N.J. 537 (1963)). See also WCI-Westinghouse, Inc. v. Edison Township, 7 N.J.

Tax, 610, 619 (Tax 1985), aff’d, 9 N.J. Tax 86 (App. Div. 1986). However, when the proofs

submitted in support of one approach overshadow those submitted in support of any other

approach, the court may conclude which approach should prevail. ITT Continental Baking Co.,

supra, 1 N.J. Tax 244; Pennwalt Corp. v. Holmdel Township, 4 N.J. Tax 51 (Tax 1982).

1. Income Capitalization Approach

Here, both appraisers determined that the income capitalization approach was the most

suitable method to derive an estimate of market value for the subject property. The court

concludes, as did the appraisers, that the income capitalization approach is the most appropriate

method to value the subject property.

When a property is income-producing, the income capitalization approach is the favored

method for determining the estimated value of that property. Parkway Village Apartments Co. v.

Township of Cranford, 8 N.J. Tax 430 (Tax 1985), aff’d, 9 N.J. Tax 199 (App. Div. 1986), rev'd

on other grounds, 108 N.J. 266 (1987); Helmsley v. Borough of Fort Lee, 78 N.J. 200 (1978); Hull

Junction Holding Corp. v. Borough of Princeton, 16 N.J. Tax 68, 79 (Tax 1996). The income

capitalization approach is “based on the principle of anticipation, which states that value is created

by the expectation of benefits to be derived in the future. In other words, the value of an apartment

property reflects what a prudent purchaser-investor would pay for the present worth of an

anticipated annual income stream and the reversionary benefit to be realized at the end of the

anticipated holding period.” Appraisal Institute, The Valuation of Apartment Properties, 97 (2nd

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ed. 2008). Thus, the income capitalization approach converts the benefits to be realized from a

future stream of income and reversionary benefit into a present value. As Judge Hopkins

succinctly stated, in valuing a property using the income capitalization approach:

the gross rental value of the property is estimated. From the
estimated gross rental there is deducted a factor for possible
vacancies and collection losses. This results in effective gross
income. Then all the expenses involved in running the property are
subtracted, resulting in net income. Net income is the money which
an investor could expect to receive through an investment in the
property. It is computed into a value by means of a capitalization
rate which embodies consideration of capital cost, remaining
economic life of the property, and the degree of risk involved.

[Lamm Associates v. West Caldwell Bor., 1 N.J. Tax 373, 377 (Tax
1980).]

Thus, the first and often most critical “step in applying the income approach is to accurately

forecast the future income and expenses associated with ownership of the property.” The Valuation

of Apartment Properties, supra, at 97. Forecasting a property’s gross rental income requires an

appraiser to discern “the economic rent, also known as the ‘market rent’ or ‘fair rental value.’”

Parkway Village Apartments, supra, 108 N.J. at 270; see also New Brunswick v. State Div. of Tax

Appeals, 39 N.J. 537 (1963).

a. Market Rent

The term market rent or economic rent, refers to “the most probable rent that a property

should bring in a competitive and open market reflecting all conditions and restrictions of the lease

agreement, including permitted uses, use restrictions, expense obligations, term, concessions,

renewal and purchase options and tenant improvements.” The Dictionary of Real Estate Appraisal,

supra, at 121-22. The market rent ascribed to a property under the income approach may differ

substantially from the “contract rent,” or actual rent collected by the owner of the property, which

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may be below market rates. Parkview Village Assocs. v. Borough of Collingswood, 62 N.J. 21,

29-30 (1972).

In order to compute the subject property’s annual apartment rental income, both appraisers

agreed that it was necessary to examine the subject property’s rent rolls as of the October 1, 2013,

October 1, 2014, and October 1, 2015 valuation dates. However, after reviewing the rent rolls,

plaintiff’s appraiser and defendant’s appraiser reached very different conclusions with respect to

the subject property’s estimated annual rental income.

Plaintiff’s appraiser calculated the subject property’s annual rental income by examining

plaintiff’s September 25, 2013, September 25, 2014, and September 24, 2015 rent rolls. Copies of

said rent rolls were attached as exhibits to plaintiff’s appraiser’s report. Main Union’s rent rolls

reported gross monthly apartment rental revenues of: $62,278.47, as of September 25, 2013;

$63,650.05, as of September 25, 2014; and $65,710.93, as of September 24, 2015. Thus, to

compute the subject property’s estimated annual apartment rental income, plaintiff’s appraiser

multiplied the monthly gross apartment revenue by 12 months. Plaintiff’s appraiser determined

an annual apartment rental income of: $747,341.64, for the 2014 tax year ($62,278.47 x 12);

$763,800.60, for the 2015 tax year ($63,650.05 x 12); and $788,531.16, for the 2016 tax year

($65,710.93 x 12).

Similarly, in computing his “Gross Apartment Revenue,” defendant’s appraiser examined

Main Union’s September 25, 2013, September 25, 2014, and September 24, 2015 rent rolls.

Defendant’s appraiser further consulted Main Union’s “Move Outs” statements, and Income and

Expense Statements for the tax years ending 2013, 2014, and 2015. The “Move Outs” statements

identify, by unit number and date, when a tenant vacated an apartment during the calendar year.

However, the “Move Outs” statements do not reveal how long said units remained vacant, when

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the units were re-let, or the new rental amount for such units. Ultimately, defendant’s appraiser

rejected the vacancies reported on plaintiff’s “Move Outs” statements, and “accepted the vacancy

as reported on the rent rolls.” Defendant’s appraiser “stabilized” the apartment rents for the 2014,

2015, and 2016 tax years “in recognition of” the unit-months “of reported vacancy.”

Unfortunately, defendant’s appraiser offered no clear explanation or delineated formula to the

court describing how he calculated the “stabilized” apartment “revenues for recognition of any

vacancies” as of “12/31/2013,” “12/31/2014,” and “12/31/2015.” Defendant’s appraiser computed

“stabilized” annual apartment rental revenue of $757,886, for the 2014 tax year; $757,500, for the

2015 tax year; and $782,152, for the 2016 tax year.

In Parkview Village Assocs. our Supreme Court explained that:

[i]n the absence of convincing evidence to the contrary the current
ongoing income scale of a large, well-managed apartment project. .
. functioning as customary with leases of relatively short length,
should be deemed prima facie to represent its fair rental value for
purposes of the capitalized income method of property valuation. A
court or taxing agency should be most hesitant to find that the
tenants of a residential property being operated commercially are
being charged inadequate rent.

[Parkview Village Associates v. Collingswood, 62 N.J. 21, 34
(1972).]

Thus, the actual rents paid by tenants of a well-managed apartment complex are clear evidence of

economic rent. G & S Co. v. Borough of Eatontown, 2 N.J. Tax 94, 98 (Tax 1980), aff’d, 6 N.J.

Tax 218 (App. Div. 1982).

When an apartment complex is well-managed, the court is required to accord the taxpayer

a presumption that the actual rent collected as of the assessing date equals the economic rent. Glen

Wall Assocs. v. Twp. of Wall, 99 N.J. 265, 276 (1985). When the “gross rental value of the

property on the respective assessing dates . . .[is] based on the actual rent rolls and. . . no convincing

12
testimony [was presented] that the management was not charging market rent,” that is the most

trustworthy evidence of income. Jefferson House Investment Co. v. Chatham, 4 N.J. Tax 669, 676-

77 (1982). Moreover, when a property experiences a period of vacancy decontrol, the “proper

method of arriving at the economic rent. . . , where there is proof of competent management, is to

annualize the actual rents as of the assessing date. This approach contemplates that the assessor,

in each year during the transition period from rent control to free market rentals, would reassess

the property based on the changed rentals on each assessing date until the transition is substantially

completed.” Frieman v. Randolph Township, 8 N.J. Tax 264, 271 (Tax 1986), aff'd, 216 N.J.

Super. 507 (App. Div.1987) (emphasis added). “An analysis of rents must begin with the present

rent schedule for the subject property.” Brunetti v. City of Clifton, 7 N.J. Tax 161, 172 (Tax 1984).

Thus, when available, the “actual rent roll” of a property as of the “critical assessing date” is

fundamental to determining the true value of a property. Glen Wall Assocs., supra, 99 N.J. at 274.

A municipality can only overcome the presumption accorded a well-managed apartment

complex by presenting “‘convincing evidence’ that (1) the leases are not economic because the

property is not well managed, (2) the leases are not economic because they are old, long term

leases, or (3) the leases are not economic as shown by a comparison with at least four comparable

apartment properties.” Parkway Village Apartments Co., supra, 108 N.J. at 272.

Here, none of the foregoing exceptions applies. Defendant failed to offer any evidence, let

alone “convincing evidence,” that the subject property was not well-managed; that plaintiff’s

September 25, 2013, September 25, 2014, and September 24, 2015 rent rolls did not reflect market

rent because they arose from old, long term leases; or that defendant has analyzed not less than

four competitive apartment complexes, and determined that plaintiff’s rents are not economic.

Moreover, defendant offered no evidence that plaintiff failed to maximize the permissible rents

13
under Little Falls Township’s rent control ordinance, or that following a vacancy, plaintiff

neglected to establish a new base market rent under the ordinance’s vacancy decontrol provisions.

In sum, defendant offered no empirical evidence to lead the court to conclude that the actual rents

collected by plaintiff and rent rolls, as of October 1st of each pre-tax year, were not representative

of economic rent. Accordingly, the court concludes that the actual rents paid by tenants, and

reported on plaintiff’s September 25, 2013, September 25, 2014, and September 24, 2015 rent

rolls, are the best evidence of economic rent.

However, accepting the rent rolls as evidence of economic rent, as of the October 1, 2013,

October 1, 2014, and October 1, 2015 valuation dates, does not invariably lead the court to

conclude that plaintiff’s appraiser’s or defendant’s appraiser’s computation of annual rental

income is entirely accurate. The evidence and testimony adduced during trial revealed that a

significant and material deficiency existed in both plaintiff’s and defendant’s appraisers’

calculations of the subject property’s annual rental income.

According to the testimony and appraisal reports of plaintiff’s appraiser and defendant’s

appraiser, respectively, their annual computations of rent “[e]xcludes free supers apartment,” and

“excludes apartment occupied by on-site superintendent.” However, the court’s review of the

September 25, 2013 and September 25, 2014 rent rolls disclosed that they ascribed a monthly

“Rent Charge” to 51 apartment units. Moreover, as of the date of preparation of the September

25, 2013 rent roll, apartment unit 38-D was vacant and unoccupied, and thus ascribed no “Rent

Charge.” In addition, the September 25, 2014 rent roll contains a handwritten notation “46-B

Imandt $1,238.70.” However, the “Rent Charge” of $1,238.70, ascribed to apartment unit 46-B,

was not included in the September 25, 2014 rent roll’s monthly gross rental totals. Furthermore,

the evidence offered during trial revealed that the on-site superintendent, “Joseph Diaz,” did not

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occupy either unit 38-D or unit 46-B. Thus, when the court ascribes a “Rent Charge” to apartment

unit 38-D, or includes apartment unit 46-B in the computation of the monthly rent roll, all 52

apartment units in the complex are ascribed a “Rent Charge.” In other words, the monthly rent

rolls, relied on by plaintiff’s and defendant’s appraisers to compute their annual rental income, fail

to exclude the on-site superintendent’s apartment. Neither plaintiff, nor defendant identified the

apartment unit occupied by the on-site superintendent, nor the “Rent Charge” ascribed to his unit.

Thus, contrary to the evidence and testimony adduced during trial, the annual rental income

calculations offered by both plaintiff’s and defendant’s appraisers included a “Rent Charge”

ascribed to the on-site superintendent’s apartment.

Further, during cross-examination, plaintiff’s appraiser came to realize that Main Union’s

September 25, 2013 rent roll ascribed “no rent charge amount. . . for unit 38-D,” and the September

25, 2014 rent roll ascribed no rent charge to unit 46-B. Thus, plaintiff’s appraiser admitted that

his annual rental income calculations for the 2014 and 2015 tax years were “understated.” During

cross-examination, plaintiff’s appraiser readily admitted that such miscalculation “was my error.”

In sum, plaintiff’s appraiser’s computation of the subject property’s annual rental income for the

2014 and 2015 tax years inadvertently omitted rental income.

Moreover, the September 24, 2015 rent roll attributes a monthly “Rent Charge” to all 52

apartment units, with no units being reported as vacant. Thus, plaintiff is either receiving rent

from the on-site superintendent, or ascribing a monthly “Rent Charge” to the on-site

superintendent’s apartment unit.

According to the “Move Outs” statements, unit 38-D was vacated on September 3, 2013.

Apartment unit 38-D was subsequently rented shortly thereafter for the sum of $1,300 per month.

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Additionally, as of September 25, 2014, apartment unit 46-B was occupied at a monthly rent of

$1,238.70.

Therefore, the court shall compute the annual rental income for the subject property, as of

the October 1, 2013 valuation date, as follows: the court accepts plaintiff’s September 25, 2013

rent roll as evidence of market or economic rent totaling $62,278.47. To the aforesaid sum, the

court adds a monthly “Rent Charge” of $1,300, representing the monthly market rent for unit 38-

D. Thus, the total estimated monthly rental income for the subject property, as of October 1, 2013

valuation date, is $63,578.47 ($62,278.47 + $1,300 = $63,578.47). Correspondingly, the estimated

annual rental income for the 2014 tax year is $762,941.64 ($63,578.47 x 12 months =

$762,941.64). The court shall compute the annual rental income for the subject property, as of the

October 1, 2014 valuation date, as follows: the court accepts plaintiff’s September 25, 2014 rent

roll as evidence of market or economic rents totaling $63,650.05. To the aforesaid sum, the court

adds a monthly “Rent Charge” of $1,238.70, representing the monthly rent for unit 46-B. Thus,

the total estimated monthly rental income for the subject property, as of the October 1, 2014

valuation date, is $64,888.75 ($63,650.05 + $1,238.70 = $64,888.75). Correspondingly, the

estimated annual rental income for the 2015 tax year is $778,665 ($63,650.05 x 12 months =

$778,665).

The court shall compute the annual rental income for the subject property, as of the October

1, 2015 valuation date, as follows: the court accepts plaintiff’s September 24, 2015 rent roll as

evidence of market or economic rents totaling $65,710.93. Because the aforesaid sum accounts

for a “Rent Charge” for all 52 apartment units, the court need not add to the monthly totals. Thus,

the estimated annual rental income for the 2016 tax year is $788,531.16 ($65,710.93 x 12 months

= $788,531.16).

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b. Other Income

Main Union’s income and expense statements reflected additional or other income derived

from late charges, bad check charges, laundry amenities, application fees, re-rent fees, short-term

lease renewals, and reimbursed legal fees, as follows: (i) $5,399, for the 2014 tax year; (ii) $8,127,

for the 2015 tax year; and (iii) $4,374, for the 2016 tax year. Thus, in calculating the Effective

Gross Income, plaintiff’s appraiser included the total amounts reflected above, as additional or

other income for the subject property for the 2014, 2015, and 2016 tax years.

Conversely, defendant’s appraiser included only additional or other income arising from

re-rent fees, short-term lease renewals, laundry amenities, reimbursed legal fees, and application

fees. Thus, defendant’s appraiser calculated additional or other income for the subject property

of: (i) $5,399, for the 2014 tax year; (ii) $4,066, for the 2015 tax year; and (iii) $3,427, for the

2016 tax year. In sum, defendant’s appraiser excluded from his calculation of the Effective Gross

Income amounts attributable to late charges and bad check charges.

In an apartment project, the income that a property owner receives is not merely income

generated from the rental of the real estate, but rather is the net income of the business conducted

on the real estate. Thus, it is common in an apartment complex to generate “non-rent other

income” from a variety of sources, including parking, amenities (such as a pool or tennis court),

laundry facilities, application fees, late charges, etc. The Valuation of Apartment Properties, supra,

at 13. In effect, under certain circumstances, a percentage of an apartment complex’s income

stream may be “imputable to intangible as well as tangible personalty.” Id. at 99. When performing

an income capitalization approach to value an apartment complex, the difficulty arises in

segregating the income attributable to the use of the real estate from the income generated by the

operation of the business.

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The term Potential Gross Income comprises and is defined as:

rent for all space in the property – e.g. contract rent for current
leases, market rent for vacant or owner-occupied space. . .
rent from escalation clauses

reimbursement income

all other forms of income to the real property – e.g., income from
services supplied to the tenants, such as. . . storage, and garage
space, and income from coin operated equipment and parking fees.

[The Appraisal of Real Estate, supra, at 478.]

Accordingly, the court concludes, as did defendant’s appraiser, that amounts paid as rent,

fees for services provided by the property owner, expenses reimbursable to the property owner,

and amounts received for amenities furnished should be included as additional or other income.

Thus, the court shall include the re-rent fees, short-term lease renewals, laundry amenities,

reimbursed legal fees, and application fees as additional or other income of the subject property.

Conversely, the court shall exclude from additional or other income the late charges and bad check

charges.

Moreover, the term Effective Gross Income is defined as the “anticipated income from all

operations of the real property after an allowance is made for vacancy and collection losses and an

addition is made for any other income.” The Appraisal of Real Estate, supra, at 451 (emphasis

added). Thus, the court concludes, as did plaintiff’s appraiser, that the additional or other income

should be added to the Potential Gross Income only after the appropriate allowance has been made

for vacancy and collection losses.

c. Vacancy and Collection Loss

Vacancy and collection losses are “usually estimated as a percentage of Potential Gross

Income, which varies depending on the type and characteristics of the physical property, the

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quality of its tenants, the type and level of income streams, current and projected market supply

and demand conditions, and national, regional, and local economic conditions.” Appraisal

Institute, The Appraisal of Real Estate, 478 (14th ed. 2013).

Plaintiff’s appraiser applied a vacancy and collection loss factor of 2% of Potential Gross

Income for the 2014, 2015, and 2016 tax years. Plaintiff’s appraiser explained that he applied the

subject property’s actual vacancy rate for each tax year, which he computed at 1.5%. Moreover,

based on his experience, he determined that a collection loss factor of 0.5% should apply.

Defendant’s appraiser reviewed Main Union’s “Move Outs” statements to calculate the

actual reported vacancy for the subject property, which he discerned was 2.40% for the year ending

2013, 1.12% for the year ending 2014, and 1.38% for the year ending 2015. In addition,

defendant’s appraiser consulted apartment vacancy rates of the Passaic County submarket,

published by Real Estate Information Services (“REIS”), which revealed average vacancy rates of

2.40% for the 2013 calendar year, 2.90% for the 2014 calendar year, and 2.50% for the 2015

calendar year. Defendant’s appraiser further reviewed vacancy rates for The Brownstone and Park

Lane Apartments, the immediately adjacent garden apartment complexes. His review of those

similar complexes disclosed vacancy rates between 1.40% - 1.77%, for the 2014 tax year; 1.67%

- 2.81%, for the 2015 tax year, and 1.14% - 2.81%, for the 2016 tax year. Accordingly, defendant’s

appraiser applied a stabilized vacancy rate of 2.50%, and a collection loss of 1%, for each tax year,

or an overall vacancy and collection loss factor of 3.50%.

The court finds plaintiff’s appraiser’s 2014 tax year vacancy rate is not supported by

credible evidence. Although plaintiff’s appraiser expressed that the 2014 tax year vacancy rate for

the subject property was 1.5%, evidence introduced during trial revealed that the subject property’s

vacancy rate was actually 2.40%.

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Additionally, although market data can be a very effective and useful tool in discerning

vacancy rates, the court concludes that the actual vacancy rates faced by a well-managed apartment

complex are the most compelling evidence of vacancy during the tax years at issue. The REIS

reports relied on by defendant’s appraiser are not controlling because it is unclear whether those

vacancy rates apply to market rate rental units or units that are subject to rent control ordinance,

like the subject property.

Thus, giving the most weight to the vacancy experience rates of the subject property during

the tax years at issue, the court accepts the following vacancy rates as credible market evidence:

2.50%, for the 2014 tax year; 1.5%, for the 2015 tax year; and 1.5%, for the 2016 tax year.

Moreover, the court finds defendant’s appraiser’s collection loss factor of 1% the most reliable

evidence for the 2014, 2015, and 2016 tax years. Therefore, the court will apply a vacancy and

collection loss factor of 3.50% for the 2014 tax year, and a vacancy and collection loss factor of

2.5% for the 2015 and 2016 tax years.

d. Operating Expenses

The third step in the income capitalization approach is determination of the appropriate

operating expense deductions. Operating expenses are the “periodic expenditures necessary to

maintain the real property and continue production of the effective gross income, assuming prudent

and competent management.” The Appraisal of Real Estate, supra, at 479.

Plaintiff’s appraiser stabilized operating expenses for management and reserves at 5% of

the Effective Gross Income. In addition, plaintiff’s appraiser stabilized repair and maintenance

expenses at the subject property’s three year average. The balance of the operating expenses

deducted by plaintiff’s appraiser for salaries, snow removal, grounds maintenance, utilities, water,

extermination, insurance, professional fees, office expenses, travel and truck expenses, telephone,

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inspection fees, and miscellaneous expenses were the subject property’s actual incurred expenses.

According to plaintiff’s appraiser, he was satisfied, based on his review and comparison of the

operating expenses of the subject property to the operating expenses of The Brownstone apartment

complex, that the subject property’s operating expenses were reasonable. Plaintiff’s appraiser did

not consult, analyze or review any other market data, surveys or reports, or engage in any analysis

to ascertain whether the actual operating expenses of the subject property were reflective of the

marketplace.

Conversely, because certain expenses including the superintendent, on-site management

office, and employee salaries were shared between The Brownstone and Main Union, defendant’s

appraiser accepted only limited actual reported expenses and elected to stabilize the balance.

Defendant’s appraiser accepted Main Union’s reported expenses for water and sewer, utilities,

insurance, and repairs and maintenance. Defendant’s appraiser stabilized management expenses

at 5%, and miscellaneous expenses at 1%, of the Effective Gross Income. Defendant’s appraiser

further stabilized landscaping and snow removal fees, advertising, professional fees, payroll, and

reserves.

However, conspicuously absent from both plaintiff’s appraiser’s and defendant’s

appraiser’s stabilized operating statements were any deduction for the value of the

superintendent’s apartment unit. As set forth above, the September 25, 2013 rent roll, September

25, 2014 rent roll, and September 24, 2015 rent roll, relied on by both plaintiff’s and defendant’s

appraisers in establishing the annual income for the subject property, ascribed a “Rent Charge” to

the superintendent’s apartment unit. It is well-settled that when an appraiser ascribes a rent charge

to a “free” apartment unit occupied by the on-site superintendent, a corresponding expense

deduction must be accounted for in the operational expenses of the property. See Parkway Village

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Apartments Co., supra, 8 N.J. Tax at 446 (concluding that “an allowance must be made for the

apartments of the superintendent and the assistant superintendent, this being appropriate because

the owner was charged with the income to be achieved from these two units yet was not receiving

the rent in full because the apartments constituted additional compensation to the stated

employees.”); see also Double R Enterprises v. Bordentown Twp., 12 N.J. Tax 455, 468 (Tax

1992); River Drive Village v. City of Garfield, 7 N.J. Tax 632, 641 (Tax 1985); Brunetti v. City

of Clifton, 7 N.J. Tax 161, 177 (Tax 1984); Knollcroft Apartments v. Fair Lawn Borough, 3 N.J.

Tax 25, 37 (Tax 1981).

The failure of both plaintiff’s appraiser and defendant’s appraiser to deduct, as an operating

expense, the imputed annual value of the superintendent’s unit on their stabilized operating

statements renders the stabilized operating expenses of little value to the court. Moreover, any

deduction that the court could apply to the stabilized operating expenses would be based merely

upon supposition and conjecture. Neither plaintiff’s appraiser nor defendant’s appraiser could

identify for the court the apartment unit occupied by the superintendent, or the “Rent Charge”

which was ascribed to that particular unit. The court’s review of the rent rolls discloses a rent

range of $588.30 to $1,550.00 per month. Thus, if the court attempted to ascribe a deduction value

to the superintendent’s apartment unit, and used an inaccurate value, the resulting Net Operating

Income would be materially affected. Moreover, any deviation in Net Operating income may

cause the corresponding computation of the subject property’s true value to be inaccurate.

Because neither plaintiff nor defendant presented the court with this crucial operating

expense information, the court is unable to discern the Net Operating Income of the subject

property. Accordingly, the court is unable to derive an estimate of value for the subject property

using the income capitalization approach.

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III. Conclusion

For the above stated reasons, the court concludes that plaintiff has failed to prove, by a fair

preponderance of the evidence, that the 2014, 2015, and 2016 tax year assessments on the subject

property exceed its true value. In addition, the court further concludes that defendant has failed to

prove, by a fair preponderance of the evidence, that the 2014, 2015, and 2016 tax year assessments

on the subject property are less than its true value.

Accordingly, the court will enter judgment dismissing plaintiff’s Complaints, defendant’s

Counterclaims, and affirming the local property tax assessments in this matter.

Very truly yours,

/s/Hon. Joshua D. Novin, J.T.C.

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