This article, written by Bruce Stavitsky, this article appeared in the
NJPA Real Estate Journal.
Benefits and Conditions of Complying with "Chapter 91"
For the past several months, tax assessors in many municipalities throughout the state of New Jersey have been mailing to property taxpayers demands for year end 2003 income and expense statements. These requests are sent to either the owner of record, or in the case of net leases, the taxpayer responsible for payment of taxes directly to the municipality. Property owners and those that tenant real estate that generates rental income are obligated to return these demands or otherwise effectively lose their right to a successful tax appeal before the April 1st appeal deadline.
Both taxpayers and municipalities alike refer to these demands as "Chapter 91" requests that are based on a state statute, N.J.S.A., Title 54:4-34. This law requires that the taxpayer respond to the request within 45 days or lose the ability to appeal. Because it is essential to complete and file these demands in order to preserve tax appeal rights, tenants, landlords and property tax practitioners often refer to them as "silent killers".
Practitioners are accustomed to asking their tenant clients whether a Chapter 91 demand has been received before filing a tax appeal. If the demand goes directly to the landlord, tenants are unaware. Very often the only notice to taxpayer and their attorney about whether or not there has been a response is the receipt of a motion to dismiss the tax appeal after it has been filed.
It is very clear that the owner of income producing real estate in a net lease scenario where the tenant is responsible for payment of real estate taxes does not have very much motivation to complete and file these income and expense demands. That is why tenants are counseled to obtain from the landlord these demands and file them on their own. But it is also important for landlords to see that the demand is completed and timely filed. For example, what if the demand is not completed, the taxing jurisdiction reassesses the property, tenant subsequently vacates the property and the income stream to the landlord ends? The landlord may be barred from a tax appeal for a year and must absorb a possible real estate tax increase. So we can see that in some cases it is in the best interests of all parties to file.
The form itself is not difficult to complete and requires certain essential property information including building square footage, year of construction and the use of the building. For example, is it retail, office or a warehouse?
The essential part of the demand is reporting income to the taxing jurisdiction. It is recommended that the person answering the demand be fully compliant if the decision is made to report.
Under what conditions is it be advisable not to comply with Chapter 91? Where there is reason to believe that the property is under-assessed and that the reporting of this income may trigger a reassessment.
It is necessary to report the property's gross possible income, escalation income and percentage rent. It is common to see motions to dismiss filed by the taxing jurisdiction where the taxpayer may have reported rent but not in all its forms. Cities and towns are sophisticated enough to realize that in many situations landlords enjoy receipt of escalation rents over a period of time. Also, especially in retail and shopping center properties, landlords will collect percentage rent based on an annual sales volume generated by the tenant in the leased space. This is reportable income.
Building expenses are an item that also must be reported although they are less relevant in a net lease situation because expenses are absorbed by the tenant and do not affect the landlord's net income. Relevant building expense items are such items as utilities (heat, light, water, power, sewer), broker's commissions, management, insurance, maintenance and repairs. The reporting of these items is a collaborative affair between landlord and tenant.
A review of the Chapter 91 demand also will show that there is a Schedule A that must be completed. This schedule provides for the reporting of the type of rental space (industrial, retail, warehouse, office, apartment), location of rental space (is it first floor, second floor or multiple stories?), status (is the space occupied or vacant?) and, lease classification (net or gross?).
As a matter of convenience, it is common for taxpayers to attach a copy of their lease or lease abstract to the demand.
Don't despair if you receive a dismissal motion after the filing of your tax appeal complaint. There are some remedies that are available to you: 1) Was the motion to dismiss made by the taxing jurisdiction filed within six months of the filing of your tax court complaint? If not, the motion to dismiss will be denied and your tax appeal will be allowed to proceed. 2) If the tax court judge dismisses the complaint, you can request a "reasonableness hearing". The reasonableness hearing allows you to subpoena the tax assessor and appear in tax court to examine the assessor about her methodology in arriving at the assessment. If the judge determines that what the assessor did was egregious, your appeal may be reinstated. 3) As the Boston Red Sox cried in 2003, "wait 'til next year". Make sure that the response is filed for the coming year. This way your appeal will not be sidetracked by an administrative obstacle. Instead, you, your attorney and appraiser can focus on proving the fair market value of the property.