Property tax exemption stripped from Morristown Memorial Hospital

Finding that Morristown Memorial Hospital (the “Hospital”) is a for-profit enterprise, the New Jersey Tax Court upheld the denial of a local property tax exemption on all but a few areas of the Hospital’s facilities located in the Town of Morristown. The Town denied the exemption for tax years 2006 through 2008, previously granted pursuant to N.J.S.A. 54:4-3.6 and the Hospital appealed to the Tax Court.

photo courtesy of NJ.com

photo courtesy of NJ.com

The exemption statute provides for a property tax exemption for property “used in the work of associations and corporations organized for hospital purposes” as long as such property and “the associations, corporations or institutions using and occupying them . . . are not conducted for profit.” Under the statute any area leased to a profit-making enterprise or otherwise used for any other non-exempt purpose is not entitled to the exemption.

The New Jersey Supreme Court has held to secure an exemption under the statute, three criteria must be met: (1) the owner must be organized exclusively for the exempt purpose; (2) the property for which an exemption is claimed must be actually and exclusively used for that tax exempt purpose; and (3) the operation and use of the property must not be for profit.  See Hunterdon Med. Ctr. V. Township of Readington, 195 N.J. 549 (2008) and Paper Mill Playhouse v. Millburn Twp., 95 N.J. 503 (1984)

In the Morristown Memorial matter, the court had ruled previously that the first two prongs of the exemption test had been satisfied when it found that the property is owned by an entity organized exclusively for a tax-exempt purpose and that nearly all of the Hospital’s facilities were actually used hospital purposes. However, the Hospital failed the third prong, known as the profit test.

The Town did not submit any affirmative proofs in this case. Thus, the determination by the court was based solely on “the sufficiency and credibility of the Hospital’s proofs.” It was here that the Hospital’s case started to unravel as the court found two of its witnesses – who testified as to the basic structure, organization, operation and various uses of the Hospital and its corporate affiliates – were “at times . . . less than forthcoming, and often lacking sufficient support or foundation.”

Citing the Supreme Court’s opinion in International Schools Services, Inc. v. West Windsor, 207 N.J. 3 (2011)  the Tax Court here acknowledged that an organization seeking an exemption may have both exempt and non-exempt sues occurring on its property provided that “the two purposes can be separately stated and accounted for and so long as the non-exempt use is never subject to the property tax exemption.” After consideration of the Hospital’s proofs, the court was unable to discern between the non-profit activities conducted by the Hospital and the activities of affiliated for-profit entities contrary to the Supreme Court holding in International Schools that requires a claimant for an exemption “to conduct its affairs in such a fashion as to allow local taxing authorities to readily determine its eligibility for exemption.”

The court was troubled also by the fact that the Hospital operates in a similar fashion to for-profit hospitals operating as “labyrinthine corporate structures, intertwined with both non-profit and for-profit subsidiaries and unaffiliated corporate entities.”

The court noted that many non-profit hospitals, including Morristown Memorial, “generate significant revenue and pay their professionals salaries that are competitive even by for-profit standards.”  More troubling to the court in this matter is that private doctors and medical practices operate at Morristown Memorial and are able to earn and retain income generated on the subject property.  The court held this violates the profit prong of the Paper Mill test because a for-profit activity is conducted at the site.  The court rejected the argument by the Hospital that the focus of the profit test is on the profitability of the tax-exempt entity, and held that the for-profit activities of the doctors must be considered.

Another component of the profit test is the reasonableness of the compensation paid by the claimant.  In this regard, the court found that the Hospital was unable to establish the reasonableness of the compensation paid to its executives.

It may well be that we have not seen the last of this case.  As of this writing, the Hospital was not sure if would appeal the decision.  Also, it remains to be seen whether Morristown Memorial and other New Jersey hospitals seek relief from the Legislature.  One thing is for certain, the reach of this decision goes far beyond Morristown.  Dozens of municipalities across the State will have to take a hard look at hospital exemptions within their borders.  At the same time, dozens of hospitals that enjoy local property tax exemptions will have to undertake a careful review of their operations in light of this new opinion.

A copy of the Tax Court’s opinion in AHS Corp., d/b/a Morristown Memorial Hospital v. Town of Morristown may be found here.

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The Dos & Don’ts of Chapter 91 Requests

Every year motion practice heats up in the Tax Court with municipalities armed with “Chapter 91” motions.  As previously mentioned many times on this blog, N.J.S.A. 54:4-34, also known as “Chapter 91,” requires income-producing property owners to respond to the assessor’s request for income and expense information.  Under the statute, failure to provide the information to the assessor within 45-days of the request will bar any appeal in the subsequent year.  Given that Ch. 91 motions need to be filed within 180 days after the filing of the complaint or 30-days before the trial date (whichever comes first), municipalities churn out many Ch. 91 motions to dismiss taxpayer complaints shortly after the filing deadline.

return-to-senderIn First Growth Plaza, LLC v. Borough of Raritan, the Borough filed a motion to dismiss the taxpayer’s complaint for failure to respond to the assessor’s Chapter 91 request.  The taxpayer’s sole argument to defeat the motion was that the Ch. 91 request sent by the assessor via certified mail was “unclaimed,” and thus the assessor failed to fulfill his/her statutory obligations under N.J.S.A. 54:4-34.  The assessor sent the Ch. 91 request to the taxpayer by regular mail and certified mail.  The regular mail was returned to the assessor marked as “RETURN TO SENDER INSUFFICIENT ADDRESS UNABLE TO FORWARD.”  Meanwhile, the certified request was returned to the assessor marked “UNCLAIMED” with proof of three (3) failed attempts at delivery.

Unfortunately for the taxpayer, the Tax Court judge was not persuaded by its argument.  Although the Ch. 91 request sent by regular mail was returned to the assessor for “insufficient address,” the burden does not fall on the assessor to “track down” the taxpayer’s new mailing address.  The court stated that placing such obligations on tax assessors would be “impractical and burdensome.”  Moreover, the certified mail was returned as “unclaimed” after multiple attempts of delivery evidencing that the taxpayer failed to retrieve the mail after notification by the postal service.  In addition, what was more detrimental to the taxpayer was the fact that in a prior appeal the assessor’s certified Ch. 91 request was sent to the exact same address and was signed by an agent for the taxpayer.  The court granted the Borough’s Ch. 91 motion and indicated that it was clear that the address “was at one point a correct mailing address for plaintiff.”

Meanwhile, the taxpayer in 2 JFK Blvd., LLC & D. Rubin v. Twp. of Franklin successfully defended a Ch. 91 motion filed by the Township.  The facts were undisputed and straightforward.  On March 27, 2015, plaintiff filed an appeal with the Tax Court challenging the assessment on the subject property for tax year 2015.   Thereafter, the Township filed a motion to dismiss the complaint pursuant to N.J.S.A. 54:4-34.  According to the Township’s assessor, a request for income and expense information relating to the subject property was sent via regular and certified mail but plaintiff failed to respond to either request.

Plaintiff opposed the motion on grounds that a timely response was provided to the assessor’s first Ch. 91 request.  In support of its position, a certification of the property manager was provided wherein he certified that responses to the assessor’s first income and expense request was sent via regular mail.  Plaintiff further certified that the responses were addressed to the assessor at the address which appeared on the letterhead of the Ch. 91 request.

The court was thus confronted by two conflicting testimonies, the assessor claiming that the information sought was never received and the taxpayer claiming to the contrary.  The court posited two possible scenarios for the discrepancy: 1) plaintiff’s response was never delivered to the assessor by the postal service at no fault of plaintiff; or 2) the information sent by plaintiff was “misplaced or misfiled in the ordinary course of processing by Township.  Ultimately, the court denied the Township’s motion in light of the taxpayer’s certification and the severe penalty of losing the right to appeal the assessment if dismissed pursuant to Ch. 91.  “Because of the severe sanction permitted by Chapter 91, this court has been reluctant to award relief in the absence of sufficient evidence of non-compliance by the taxpayer.”  The court could not find sufficient evidence of non-compliance based on the credibility of plaintiff’s certification that he responded to the assessor’s Ch. 91 request.

These two recent decisions remind us again that it is always better to make an effort in responding to the assessor’s Ch. 91 request than to ignore it altogether.  The courts understand the severe consequences of non-compliance with a Ch. 91 request and are willing to give the benefit of the doubt to the taxpayer when presented with credible evidence of the taxpayer’s compliance.

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Sewer Issues Make Tax Appeal a Messy Affair!

The New Jersey Tax Court recently tried a dispute between a property owner and a town that began in 2006.  In William G. Orpin, Jr. v. Tp. Of Monroe, plaintiff argued that the Township’s deed restriction requiring the subject property to have a functioning sewer connection, coupled with the Township’s refusal to provide the correct cost estimate of a sewer connection to comply with that very same restriction were impediments to the marketability of the property.  Plaintiff initially appealed to the Middlesex County Board of Taxation but was unable to overcome the presumptive correctness of the County Board judgment before the Tax Court, and thus the County Board judgment was ultimately affirmed.

300px-Sewer_coverIn 2006, plaintiff sought a residential subdivision from the Township of Monroe (“Township”) to create two single-family residential lots.  Prior to the subdivision, the subject property was approximately 1.79 acres and improved with one house where plaintiff resided.   Plaintiff’s residence, however, was not connected to any sewer line but instead serviced by a septic tank.  In anticipation of the subdivision, plaintiff submitted an initial application for water and sewer connections.  Although plaintiff’s initial application for utilities was denied by the Township, the Township approved the subdivision.  Thereafter, a Township engineer informed plaintiff that a new developer was planning to install a sanitary sewer which would service the subject property but plaintiff would be responsible to reimburse the developer and pay connection fees in the total amount of $115,233.85.  Based on these new cost estimates, the Township requested plaintiff to re-submit another application to reflect these new developments.  The Township’s Planning Board also required plaintiff to include two deed restrictions, one of which required the subject property to have a functioning sewer connection to the Township’s sewer line prior to the issuance of a building permit on the vacant lot.

Sometime in 2007, plaintiff ultimately decided to the sell the vacant lot following the subdivision after he learned that the Township denied his initial application for water and sewer connections back in 2006.  However, after continued efforts, plaintiff stated that he was unable to sell the vacant lot due to the absence of utilities.  Plaintiff did, however, manage to sell his pre-existing house on the adjoining lot, and the new owners were able to obtain a connection to a public sewer line which, by this time, laid in front of the house.  Plaintiff re-listed the vacant lot on the market in 2012, and he had come across a potential buyer .  However, the buyer’s attorney was “advised [by the Township] that it will cost between $90,000 to $125,000 to connect to water and sewer.”  The buyer’s attorney also informed plaintiff that according to the Township, plaintiff had an “escrow deficit of $1,272.”  Plaintiff tried to assure the potential buyer that the buyer should deposit $35,000 towards the cost of water/sewer costs but the buyer ultimately walked away from the transaction due to the discrepancy between the plaintiff and the Township in estimating the water & sewer connection costs.

In 2014, plaintiff made an Open Public Records Act request to the Township regarding the subject property.  The Township responded by providing a bill to plaintiff of a “past due project account” in the amount of $1,237.07.  Similar to an attorney’s billing statement, entries were shown in connection with plaintiff’s 2006 water and sewer applications that were billed hourly.  The Township informed plaintiff that the “2006 reimbursements were no longer active” and thus the Township would not provide plaintiff “new cost estimates” [for the water and sewer connection] unless plaintiff paid off the outstanding charges from 2006 in the amount $1,237.07 plus another $250.

At trial, the Township made an oral motion to dismiss plaintiff’s complaint for failure to pay taxes and municipal charges pursuant to N.J.S.A. 54:3-27.  The Township argued that the outstanding balance of $1,237 qualifies as “municipal charges.”  The court, however, distinguished N.J.S.A. 54:3-27 as it applies only to complaints filed directly with the Tax Court.  In the case of an appeal filed to the Tax Court from a County Board judgment, as in here, the applicable statute would be N.J.S.A. 54:51A-1(b) which requires “all taxes or any installments thereof” outstanding for the year under appeal to be paid at the time the complaint is filed.  The applicable statute does not require the payment of all municipal charges.  Although the court did not decide on whether the outstanding charges would qualify as municipal charges, the court reserved doubt “since the charges for which a lien can be filed applies to amounts due after a water/sewer connection is provided.”

The court then addressed the crux of the matter, namely, plaintiff’s claim that the deed restriction requiring a sewer connection adversely impacted the property’s value, and that the Township’s “extortionist” behavior of refusing to provide the right cost estimates of the water and sewer connections impedes further on the marketability of the property.  The court, however, was not convinced that the deed restriction on the subject property adversely affected its marketability due to the fact that as of the valuation date (October 1, 2013), there was a sewer facility available for connection to the subject property.  Most importantly, the court stated that even if the Township’s refusal to provide information regarding the connection costs was improper, plaintiff failed to carry the burden of proving the subject’s true value.  Plaintiff’s methodology of concluding the fair market value of the property was flawed.  For instance, plaintiff vehemently disputed the Township’s estimated connection costs and yet at the same time used that very same figure to offset what he thought the subject value should be.  In addition, he failed to provide any comparable vacant land sales in 2013 because he was unaware that the valuation date was October 1, 2013.

 The Tax Court indicated that there was no statutory or other legal authority that permitted the Township from withholding the cost estimates from the plaintiff unless plaintiff paid the outstanding balance plus another $250.  It remains to be seen whether plaintiff will be able to successfully obtain connection costs from the Township and build an improvement on the vacant lot without giving in to the Township’s demands.

A copy of the Tax Court’s opinion is available here.

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The Cost Approach: Hard Costs vs. Soft Costs in the Context of Tax Appeals

New home constructions often require that the property tax assessment which is then placed on a property be carefully examined.  Generally, property assessments for the following year are set forth by the municipal assessor on October 1.  However, if an improvement of a structure is completed after the regular assessment date of October 1, and presuming the property is not tax exempt, municipalities have an opportunity to capture that value by a mechanism known as an added assessment.

Photo courtesy of  money.cnn.com

Photo courtesy of money.cnn.com

In Renna v. Highland Park, plaintiffs contested the added assessment determination for a newly constructed single-family residence by the Borough of Highland Park.  In 2011, plaintiffs purchased vacant land in Highland Park seeking to build a new residence.  Thereafter, they had  a single-family home constructed on the vacant land.  The home was completed and occupied by plaintiffs on December 1, 2012, after the valuation date of October 1, 2012.  Highland Park levied an added assessment of $229,000 on the subject property for the newly constructed improvement, which was prorated for the 12 months of tax year 2013.  Based on the Borough’s “equalization ratio”, the total assessment indicated a fair market value of the subject property of approximately $832,150.

During trial, plaintiffs’ expert argued that the subject property’s fair market value under the sales comparison approach was $700,000, and application of the cost approach would deem it as $685,000.  The Court, however, rejected both approaches.  The Court did not find credible the comparable sales selected by the expert and rejected the adjustments he made in his report, primarily because the subject property was a newly-constructed residence, while none of his comparable sales were of new or relatively new homes.

The Tax Court also rejected  plaintiffs’ expert’s cost approach because it failed to include an itemization of the “soft costs” in calculating the total actual building cost.  Plaintiffs’ expert’s report claimed that the total actual building cost was $373,000, including soft costs.  However, the construction loan covering the direct construction costs (i.e., materials, landscaping, grading, excavation, etc.) alone was $402,060, this loan did not cover payment for soft costs (i.e., legal fees, permit costs, architectural fees, engineering fees, building surveys, taxes, title fees, etc.).  As a result, the amount used was not deemed credible.

Another deficiency in plaintiff’s cost approach noted by the Court was the “lack of inclusion of entrepreneurial profit.”  Despite being built to be used as a single-family residence for the plaintiffs, the court indicated that an “entrepreneurial profit” should have been included.  However, due to plaintiffs’ expert’s failure to itemize soft costs in the cost approach, the court did not inquire further into the lack of “entrepreneurial profits.”  The Court did hint that “entrepreneurial profits” could have been inferred by the Court if plaintiffs’ expert accounted for the “soft costs” in his cost approach.

In sum, the Court concluded that both of the valuation approaches used by plaintiffs’ expert were flawed, and thus affirmed the Borough’s added assessment.

A copy of the Tax Court’s opinion is available here.

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“Oh Sandy” – No relief from Superstorm’s destruction on residential assessment

Two and one-half years after Superstorm Sandy, many New Jerseyans are still wrestling with the destruction wrought by that storm.  Thousands of New Jersey property owners received some relief from reduced property tax assessments to reflect the damage to their properties, although some local assessors were more realistic in assessing the damage to property values.  For one homeowner, a 30% reduction in the improvement value (i.e., the amount of the assessment attributable to the house) was not enough.  And, he was probably correct, although, he argued that the home was worthless.  While the home probably warranted more than a 30% reduction, it probably was not worthless, but plaintiff failed to provide sufficient evidence upon which the court could make a value determination and therefore, the assessment was affirmed.

In Cap v. Borough of Belmar, Plaintiff argued that his Superstorm Sandy damaged home was boarded up and uninhabitable as of the valuation date for tax year 2014.  In support of his claim that structure held no value, plaintiff produced photographs and the resolution the zoning board of adjustment that approved the demolition of the house.  But, as noted by the court, plaintiff failed to provide any evidence as to the extent of the damage to the home or the cost to repair same.  Nor did plaintiff provide any evidence of value of the property in its damaged state as of the assessing date.  As a result, the court affirmed the assessment, finding that plaintiff failed to overcome the presumption of correctness.  The court concluded that while plaintiff provided some evidence of damage to the home, he failed to provide any evidence upon which the court could determine what the value reduction should be in dollars.

A copy of the Tax Court’s opinion may be found here.

Related articles:

Property Damaged By Sandy? Here’s What to Expect if FEMA Inspects the Property Property Damaged By Sandy? Here’s What to Expect if FEMA Inspects the Property

After the Storm: Property Tax Issues After Sandy

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Stick to the facts (but first, know them!)

In Gravers v. Scotch Plains Township, a residential tax appeal, we are reminded of the importance of hiring appraisers with experience in tax appeals and to ensure that they are familiar with the facts relevant to the subject property and the comparable property sales.

Here – on appeal from a judgment of the County Board of Taxation – while the plaintiff produced sufficient evidence to overcome the presumption of validity, the Tax Court found that the plaintiff’s real estate appraiser failed to provide sufficient credible evidence upon which the court could render a credible determination of value.

The court in Gravers stated that the “expert’s report and testimony in this matter was devoid of crucial and fundamental factual information, market data and analysis to enable the court to accord it any weight.”   In this regard the court was referring to plaintiff’s appraiser not knowing critical information about the comparable single family home sales upon which he relied in formulating his opinion of value.  He did not know the size or age of his comparables and in one case was not aware that the property had been on the market for only a few days before going under contract.  The court found also that plaintiff’s expert was not aware that one sale of a single family home on a multi-acre lot was, in fact, a land sale, as shortly after the acquisition, the home was razed and the lot subdivided.  Nor was the appraiser familiar with the “Non-Usable” codes used by assessor’s to denote those transactions that are not usable in determining the assessment to sales ratios pursuant to N.J.S.A. 54:1-55.1 et seq.; in other words, those transactions which may not be arms-length for one reason or another.

Finding inadequate factual information, data and analysis of comparable property sales to arrive at an independent determination of value, the court affirmed the assessment under appeal and dismissed plaintiff’s complaint.

A copy of the court’s opinion in Gravers may be found here.

More information on Non Usable sale designation may be found here.

For related articles on the presumption of validity and burden of proof see:

Presumptions Foil Municipality

Taxpayer Foiled Despite Overcoming Presumption of Validity

Another Taxpayer Fails to Overcome Presumption of Correctness

Taxpayer Fails to Overcome “Presumption of Correctness”

Expert’s Opinion Off Track in Appeal Near Train Station

Tax Court Prefers Quantitative, Not Qualitative Adjustments

A Taxpayer’s Burden

No Relief for Castle on the Sand

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Drive-By Appraisals “Approved” in New York!

Drive-By Appraisals “Approved” in New York!.

via Drive-By Appraisals “Approved” in New York!.

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