Written by Bruce Stavitsky, this article appeared in the NJPA Real Estate Journal, December 24, 2004.
Analyzing Three "Rounds" of Property Tax Valuation
As a result of the New Jersey Tax Court's recent decision in International Flavors vs. Union Beach that the tax assessment should be increased, taxpayer will return to the municipality a million dollars in underpaid real estate taxes. This decision is significant because it reminds taxpayers of the risk of filing a tax appeal.
International Flavors' tax appeal involved a challenge to the $23 million assessment on its 184,000 s/f research and development facility which contained office, laboratory, and manufacturing areas. Based on a unit value of $125 per s/f, taxpayer argued that the assessment was excessive. The tax court judge said the taxpayer's value proofs were insufficient. Instead, the court found that Union Beach's appraisal was more reliable and adopted many of its findings.
Litigated tax appeals often turn into a battle royal between appraisers, and the one who presents the best report wins Akin to a boxing match, the lnternational Flavors case went three "rounds", each of which considered all of the three traditional approaches to property valuation.
Round One—Sales Comparison Approach
Taxpayer placed most reliance on comparable sales. Unfortunately for the taxpayer the court found that one comparable that sold at $33 per s/f was an industrial building with no laboratory space, so it wasn't comparable. This comparable was leased at the time of sale but there was no analysis of how the lease's rental income stream influenced the purchase price.
Another comparable at $42 per s/f sold as part of a bankruptcy proceeding and was found to be non-usable. These problems were symptomatic of taxpayers other sales.
Union Beach's appraiser, admitted that he placed little emphasis on sales. He relied on four sales, two of which were of leased fee interestss. The appraiser didn't demonstrate that the leases were at market rates. The other comparables received aggregate gross adjustments as high as 73%, rendering these sales incomparable.
Outcome: sales not "reliable". No winner.
Round Two—Rental Income Approach
The taxpayer placed its next most reliance on comparable leases. However the court found flaws in this approach because the appraisal lacked a detailed description and analysis of the building components. Because of this, the appraisal could not make meaningful adjustments to the comparables.
Another problem was that all but one of the comparables had no lab space and were used as warehouses. The court found that these properties were not comparable to or competitive with International Flavors.
The one lease that had substantial lab space failed as a reliable comparable because it was a leaseback.
Acknowledging that little weight should be given to its income approach, the court agreed with Union Beach's appraiser mostly because its leases (23,000 to 50,000 s/ft) were too small when compared to International Flavors.
Outcome: the court had "little confidence" in income. No winner.
Round Three—Cost Approach
Taxpayer's cost analysis placed least reliance on cost. The municipality gave it greatest reliance.
The court rejected taxpayers cost analysis because it didn't consider specific property characteristics. Its reliance on replacement rather than reproduction cost made it too vague and uncomplicated. The appraiser said that potential buyers of this facility would be unconcerned with its specifics because they would renovate the building to suit their own needs.
The court disagreed. Taxpayers cost analysis did not address what would make up a replacement building. Would the replacement be larger or smaller than International Flavors? Would it eliminate its multiple stories? Because these questions were unanswered, the cost approach was useless.
The court was very impressed with Union Beach's cost analysis because it incorporated the work of a cost estimator who used a reproduction method (exact duplicate) instead of the less reliable replacement cost. This cost estimator took his information from 700 pages of detailed construction plans. The court also noted that the estimator spent more than 200 hours reviewing the plans.
Although International Flavors was built in 1967, the fact that taxpayer continuously improved the facility gave the court an opening to apply reproduction cost. Even taxpayers appraiser implicitly agreed with this by concluding that the buildings had an effective age of less than 15 years!
Outcome: Union Beach's cost approach stands. Round three to the municipality.
Conclusion
1. Understand why your attorney and appraiser recommend an appeal.
2. Do you support this decision?
3. Become involved in the valuation process. Industry has an awareness of competitors' property transactions and how they relate to your building.
4. If the comparables don't seem to fit and an assessment reduction can't be negotiated, consider an appeal withdrawal. You can always come back to fight another day when the evidence exists to support your claim.