South Jersey Commercial Real Estate Today : New Jersey Commercial Real Estate Lawyer & Attorney : Chris Hogan Law Firm : Contacts, Liens, CRE : Philadelphia, Delaware, Cape May

To file a property tax appeal, or not to file, that is the question. (Apologies, again, to William Shakespeare.)  April 1^st is the deadline for most property tax appeals in New Jersey. (May 1^st if the municipality is undergoing a revaluation in 2010.)  With April 1^st fast approaching, it seemed like a good time to check in w/ Harry Renwick of Renwick and Associates.

As you will see, Harry has spent close to 50 years as a professional real estate appraiser and has extensive experience w/ real property tax appeals in New Jersey. (Full disclosure: my office does use Renwick and Associates as an expert in property tax appeals and we are proud to do so.)  I felt that his perspective on tax appeals would be helpful to any property owner or manager who has decided to file a tax appeal or is considering it.  Harry graciously agreed to participate in a Q&A session w/ me.  Because of the amount of information, the session has been broken down into 2 posts. This is Part II.  You can read Part I of the Q&A here.  (The highlighting in the answers was done by me.)  I hope that you find the following information useful:

• Are there any important factors that should be considered in deciding whether to file a tax appeal?  One of the most important things is to accurately define within which sub-market the subject property is competing. Once the appropriate sub-market is defined, you can then identify market data which are truly comparable to the subject property and, therefore, an appropriate basis for analysis. (Comparing apples to apples, rather than apples to oranges.) There are thousands of competitive sub-markets that may come into play and have to be considered when properly establishing a property’s value, making use of a qualified professional essential.
  

Another factor to consider is properly establishing a property’s “highest and best use” and the potential pitfalls in doing so. For example, it may turn out that an older, single-story office building at a high-traffic intersection has a higher/better use as a retail entity. In such a case, the filing of an appeal w/o expert assistance could result in a cross-appeal by the town and a higher property value and tax burden. (Beware of cross-appeals by the taxing municipality.)

• What is a revaluation and how can it impact on prosecuting a tax appeal?  A revaluation involves a periodic updating of all of the taxable and tax-exempt properties within a community.  A revaluation generally serves 2 purposes. One purpose is to re-establish the current Market Value of all properties and their equitable share of the overall budget levies.  Because property values become distorted over time by changing market conditions and other factors, this step is essential in order to insure equity within the system. (Make sure that each property carries its fair share of the tax burden.)
  

The second purpose is to stabilize the tax rate.  Revaluation almost always results in a higher overall community value which when divided into the current levies will have a proportionate downward influence on the tax rate.  To the surprise of many, stabilization of the tax rate typically results in greater amounts of revenue being raised for each penny of the tax rate.  For example: Assume that a town’s total assessed value immediately before a revaluation is $500M.  Each penny of a town’s tax rate is equivalent to one percent of the town’s total assessed value so, in this example, a penny from the town tax rate = $50,000.00 and each penny-increase would add another $50,000.00 in revenue to the town budget.  However, if a revaluation resulted in a new total assessed value of $1B for the town’s taxable properties, then each penny of the town tax rate would result in $100,000.00 worth of revenue.  In other words, depending on market conditions, a revaluation may enable a town to maintain or reduce the tax rate, which resonates w/ the public, while still increasing tax revenue.

Only in a revaluation year is the appeal deadline extended to May 1st as opposed to April 1st during a non-revaluation year.  In a revaluation year the new valuation appearing on the tax bill (green card) is assumed to be an accurate representation of the current resale value of the property as of Oct.1st of the pre-tax year; that is not the case in a non-revaluation year.

Owners of commercial real estate should be wary of revaluations b/c towns usually tend to shift the tax burden to Class 4 properties, i.e., away from residential properties where the voters live!

• What is an equalization rate and why is it important?  A town’s equalization rate is used to set a property’s Market Value based on the town’s current assessment of it and determine the fairness of the assessment.  (Remember: under the NJ tax system, the assessed value of a property is supposed to closely approximate the Market Value. However, Market Value can change over time whereas the assessed value typically remains constant until the next revaluation. The equalization rate is the mechanism used to translate the town’s current assessed value of the property into Market Value a/k/a as the Equalized Value.) The equalization rate, a/k/a the town-wide ratio to true value (Market Value), is a ratio established for the community by the County Board of Taxation through the sampling of usable (arms length transactions) current sales of properties across all property classes as they compare to the values established under the last revaluation.
  

Example: Assume that the last revaluation set a property’s assessed value at $1M and the town has an equalization rate of .50. In such a case, the Indicated Current Market Value (ICMV) of that property would be $2M. In other words, the town is really placing a value of $2M on the property for purposes of tax burden.  Now, if the current appraised value of the property is lower than the ICMV – e.g., $1.5M – then a successful appeal may be possible.  An appraised value at $1.5M w/ a .50 equalization rate means that the property should be assessed at $750K, not $1M.  Obviously, an assessed value of $750K should ultimately result in lower taxes against the property.

• What is an I/E report and why is it important?  An I and E report is a request for income and expense information, sent out by the town assessor, to all Class #4 (income producing industrial, commercial or multi-residential) properties. The community has the right to request this information under the Chapter 91 laws and failure to comply can result in the loss of the right to appeal. [CBH note: failure to return an I/E report to the taxing municipality in a full and timely manner can subject an appeal to a motion to dismiss from the municipality.]
  
• How and when do you think the South Jersey commercial market will rebound?  Which segment do you think will rebound first?  My crystal ball is no better than most of the professional prognosticators. Having said that, one thing is for sure: commercial always lags behind residential.  I don’t foresee any uptick in commercial until excess residential inventory is absorbed.  We also need to regain a normal balance between “new construction” inventory and “re-sale” properties.  Absorption of residential inventory and a re-balancing between new construction and re-sale are sure signs of job creation and improved purchasing power.  Job creation and improved purchasing power generally translates to increased office and retail demand.  I hate to say it, but I don’t see improvement in commercial for another 2-3 years.
• Final thoughts?  Yes, the tax system in New Jersey is very difficult for the average taxpayer to understand.  Many property owners enter into the appeal arena with the intention of lowering their total annual amount of tax and are surprised to find out that the only element that can be placed under appeal is the current market value as of the effective appeal date.  An expert should be employed that understands the subtleties and vagaries of the tax laws and tax system and their impact on the valuation process.  My recommendation is first to enter into a consulting arrangement in order to pre-test the probabilities of a successful appeal.

Thanks, Harry!
 

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If you own CRE in NJ, how do you feel about your latest assessment?  Given how bad the 2009 market was, many of you are probably looking at the assessment and thinking about filing a property tax appeal.  (The appeal deadline is 4/1/10, unless there is a revaluation taking place.)  That's good.  Just know that in many cases the amount of the assessment is not an accurate indicator of the "true value" of your property and, therefore, not the number that should be considered.  Instead, you need to know the Equalized Value for your property when deciding whether a tax appeal is warranted.

Many owners do not realize that the assessment amount on the Notice of Assessment (green card) may not necessarily reflect the true value at which a property is being assessed and taxed by the municipality. This can turn out to be an expensive misunderstanding.

Keep in mind that in NJ property taxes are supposed to be based on the fair market value (FMV) of the property and that the annual assessments are supposed to reflect the FMV of the property.  However, as time passes between revaluations, that is often not the case.  Between revaluations, assessments generally remain unchanged from year-to-year whereas market values are constantly changing.  To address market fluctuations, each year the Division of Taxation analyzes current sales of properties across all property classes in a municipality as compared to the values established under the last revaluation. This results in what is known as a municipality’s annual Equalization Ratio (a/k/a Average Ratio) The Equalization Ratio for a particular municipality can be obtained from the assessor or County Board of Taxation. You can also find 2010 Equalization Ratios here.

The Equalization Ratio is used to translate the current assessed value of a property to its true assessed value a/k/a “Equalized Value.”  The Equalized Value is supposed to reflect the FMV of the property based on the current assessment and county data.  It is calculated by dividing the total assessment from the Notice of Assessment by the municipality’s Equalization Ratio.

For example, the 2010 Equalization Ratio for Linwood, NJ, is 61.99% whereas in Margate, NJ it is 84.28%. Thus, a $1M assessment in Linwood reflects an Equalized Value of $1,613,163.40 ($1M/61.99%). Meanwhile, a $1M assessment in Margate reflects an Equalized Value of $1,186,521.10 ($1M/84.28%).

Why is Equalized Value important?  Because the Equalized Value tells an owner the true value at which the municipality has assessed the property and, in turn, is collecting taxes under the tax rate.  Only by comparing the Equalized Value to the appraised FMV of a property can one begin to determine whether a tax appeal is warranted.

So, if you are still trying to decide whether to file a tax appeal, don't just look at the assessment, look at the Equalized Value of the property.  (You should also talk to an appraiser and attorney experienced w/ tax appeals, because the "fun" does not stop w/ "Equalized Value" when pursuing a tax appeal.)
 

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To file a property tax appeal, or not to file, that is the question. (Apologies to William Shakespeare.)  April 1^st is the deadline for most property tax appeals in New Jersey. (May 1^st if the municipality is undergoing a revaluation in 2010.)  With April 1^st fast approaching, it seemed like a good time to check in w/ Harry Renwick of Renwick and Associates.

As you will see, Harry has spent close to 50 years as a professional real estate appraiser and has extensive experience w/ real property tax appeals in New Jersey. (Full disclosure: my office does use Renwick and Associates as an expert in property tax appeals and we are proud to do so.)  I felt that his perspective on tax appeals would be helpful to any property owner or manager who has decided to file a tax appeal or is considering it.  Harry graciously agreed to participate in a Q&A session w/ me.  Because of the amount of information, the session has been broken down into 2 posts. This is Part I.  (The highlighting in the answers was done by me.)  I hope that you find the following information useful:

• Tell us about your background/experience and what Renwick and Associates does.  46 years as a professional real estate appraiser.  I hold a Senior Certified General Real Estate Appraiser (SCGREA) license designation in N.J.  I also hold a Certified Tax Assessor (CTA) designation in N.J. and I am a licensed real estate Broker.  Our company specializes in litigation matters involving all types of real estate. We provide real estate consulting and appraisal services which place defensible valuations on property for the purpose of settling disputes in matters involving real estate.  The disputes typically involve: real estate tax, federal income tax, eminent domain (condemnation), consumer fraud, insurance claims, economic (market) rent, equitable distribution of estates, bankruptcies, isolation of development rights etc. More information can be found at www.renwickandassociates.com.
• In general, what is an appraisal?  An appraisal provides a defensible estimate of a property’s value as of a specific date in time. The appraisal is based on a set of disciplines required under state law. The appraiser is attempting to analyze comparable lease, cost and sales data that would be considered by participants (buyers/tenants) in a defined market. The results of this analysis are then correlated in to a final estimate of value.
• What role does an appraiser play in a property tax appeal in NJ?  An appraiser performs an appraisal of the property and typically serves as an expert witness in support of the tax appeal if/when one is filed.  (At Renwick and Associates, we provide a preliminary evaluation at no charge to give the client an idea as to whether an appraisal and appeal would be worthwhile.) When appealing an assessment, the taxing municipality will have the benefit of an “expert” in support of its position. The property owner is best served to have its own expert to combat the assessor’s position.
• Can you provide us w/ your current take on the SJ commercial market?  Anything of note in any of the following segments: multi-family; retail; or office?  The current multi-family market is generally experiencing higher than normal vacancy and credit rates directly related to the limited number of qualified tenants and the disruptions in the market related to the recession and the need to attract new qualified tenants. Operating Expense ratios are also trending upward which has a dampening effect on Annual Net Operating Income. Retail and office properties are generally following the same trend except vacancy and credit losses are considerably higher due to an over supply of space and limited number of new qualified tenants. Capitalization Rates are trending higher within each market as a direct response to the higher risk presented within the recessionary market. This also has a diminishing affect on the internal rate of return from these investments.  In short, things are tough in the South Jersey commercial market, especially in the retail and office segments.
• Why can a property tax appeal be important in today’s economic climate?   The tax laws in New Jersey and many other states employ a standard of Market Value as the basis for the equitable distribution of budget levies over the municipal or city tax base. Under the tax system, a property’s assessed value is supposed to closely approximate its Market Value as of October 1^st of the pre-tax year. In today’s economy, w/ sharply declining real estate markets, the assessed value of a property may no longer accurately represent the property’s Market Value.  If the current assessed value is proven to be inequitably high, based on a current appraisal, then substantial financial relief may inure to the property owner. 

In short: if it turns out that the current assessed value of a property is too high, a property tax appeal is the way to get it lowered and save the owner money.  If the owner is not passing through the tax burden to a tenant in full, then a high tax level would reduce Net Operating Income which, in turn, reduces the value of the property. In addition, having tax levels on a property which are competitively high can drive away potential buyers or tenants.

Check back in a couple of days for Part II of the Q&A w/ Harry Renwick regarding property tax appeals in New Jersey.

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There was an interesting decision published by NJ's Tax Court the other day in the case of Princeton Alliance Church v. Mount Olive Township, Docket No. 014826-2009.  Here's the skinny:

PAC filed an Appeal claiming that a part of its property was exempt from taxation b/c its use was partially restricted by virtue of the fact that it is located within the Highlands Preservation Area as defined by NJ's Highlands Act.  (N.J.S.A. 13:20-1, et seq.)  Before the Appeal was heard by the Board, PAC's attorney submitted a brief which included both a statement of facts and legal argument.  In essence, PAC was arguing that the State has acquired a portion of its property by placing it within the Highlands Preservation Area so as to make that portion exempt from taxation under N.J.S.A. 54:4-3.3b.

Here's where things get interesting: on the date of the Hearing, PAC's attorney appeared w/o any witnesses to present.  Instead, he indicated that there were no contested facts and sought leave to present legal argument in support of the Appeal.  He was instructed twice to present his witnesses but, alas, he had none to present.  The Board then dismissed the Appeal for lack of prosecution.  PAC filed a timely appeal to NJ's Tax Court and Mt. Olive filed a Motion to Dismiss pursuant to N.J.S.A. 54:51A-1c.

In a well-reasoned decision, Judge Bianco denied Mt. Olive's Motion to Dismiss for lack of prosecution for several reasons:

1. Dismissal under N.J.A.C. 18:12A-1.9(e) for lack of prosecution was inappropriate b/c PAC's attorney had appeared for the Hearing.  Under the regulation, dismissal for lack of prosecution is only available when the taxpayer fails to appear at all, which was not the case.
2. Mt. Olive's reliance on caselaw requiring a taxpayer to present "some proofs as to true value" was misplaced b/c the issue at hand was not valuation but, rather, exemption which makes the holding inapplicable.  Moreover, even if valuation was at issue, the Board's dismissal for failing to call a witness would still have been unwarranted as there is no statute, regulation or caselaw that specifically requires a taxpayer to present witnesses in order to advance an appeal.  (The evidentiary "proofs" required on valuation cases can be presented via cross-examination and documents.)
3. The Tax Board had an obligation to hear the legal argument from PAC's attorney under the applicable circumstances: PAC's property was only assessed at $153,000.00 meaning that it could not take a direct appeal to the Tax Court under N.J.S.A. 54:3-21. (The assessed value has to be over $750,000.00 for a direct appeal.)  If the Board failed to hear legal argument on an exemption issue, PAC and similarly situated taxpayers would be left w/o a forum to contest its assessment because -- with an assessed value at $153,000.00 -- it could not be heard directly by the Tax Court.

PAC's decision not to present any witnesses was incredibly gutsy and ultimately rewarded.  I'm not sure that the merits of its exemption argument are going to be equally well received.

Here's the moral of the story, from my point of view: if your appeal includes issues of value, get yourself an expert witness and bring him/her to the hearing, for gosh sake; if you're arguing only exemption make sure that you submit a brief with undisputed facts and argument and bring a copy of the above case with you!

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