Luxury Homeowners Lose Tax Appeal at the Appellate Division

The Appellate Division yesterday affirmed the lower court’s decision affirming the 2008 property assessment of a 55,000 sq. ft. estate in Moorestown.  The subject property, known as “Villa Collina,” boasts approximately 55,542 sq. ft. of improvements, and 29,236 sq. ft. of living space situated on approximately 7.2 acres, which is part of a larger 44 acre parcel.  The New York Times claimed that the residence is larger than Moorestown’s Town Hall, public library, and the police headquarters combined.  The Appellate Division illustrated the house in its opinion as the following:

Photo courtesy of homesoftherich.net

Photo courtesy of homesoftherich.net

“[T]he home is built in an Italianate style and boasts a Barre granite façade, granite terraces, cascading waterfalls and several reflecting pools. There are six bedrooms and eleven full bathrooms. The walls and floor of the two-story foyer are marble. A fountain of black onyx marble anchors a circular marble staircase to the second floor. The living room is topped by a large circular dome with a Venetian plaster finish. There are three kitchens (two on the first floor and a commercial kitchen in the basement), a gym, a library, two massage rooms, a hair salon, a billiards room, six storage or pantry rooms, laundry and trash rooms, a wine cellar, and two “viewing rooms” for admiring the landscape. The two-story “Lemon Room,” a sort of orangery for lemon trees, was added in 2006.”

Following a three-day trial at the Tax Court, the Tax Court judge affirmed the assessment.  On appeal, plaintiffs argued that the municipality underwent a revaluation in 2008 and thus the Tax Court should have rejected the Township’s experts “because they were contractually obligated to defend their appraised values in challenges to their 2008 revaluation.”  The Appellate Division noted that this argument “borders on the frivolous” and did not find such a factor to be a disqualifying bias.  The Appellate Division further affirmed the lower court’s application of an entrepreneurial profit in its calculation and rejection of plaintiff’s expert’s opinion of a 75% depreciation rate in the expert’s cost approach.  Plaintiff’s expert simply took his comparable sales approach value ($10,125,000), deducted the value allocated to land ($1,550,000), and compared it to the figure that he estimated to be the cost of reproducing plaintiffs’ home in 2008 ($33,850,000).  Since a hypothetical willing buyer would pay $10,125,000 for the subject property that cost $33,850,000 to build, the expert concluded that it resulted in a 75% rate of depreciation.  The Appellate Division agreed with the Tax Court that this particular methodology in calculating the depreciation rate was flawed.

To say the property is a mansion is an understatement.  For a visual of what some claim to be the largest private residence in New Jersey, please click here.

The Appellate Division’s opinion can be read here.

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Court Denies Two Motions to Dismiss Taxpayers’ Appeals

The Tax Court recently issued decisions denying Franklin Township’s motions to dismiss two taxpayers’ appeals.  In 2200 Cottontail Assocs. v. Twp. of Franklin, the Township filed a Chapter 91 motion for plaintiff’s failure to respond to the assessor’s request for income and expense information.  As mentioned previously on this blog on numerous posts, a taxpayer’s failure to respond to the assessor’s Ch. 91 request within 45-days warrants a dismissal of the taxpayer’s appeal.

2200 Cottontail Assocs. involved a tax assessor’s certified mail containing the Ch. 91 request that was returned to the assessor by the postal service stating that the recipient had “moved, left no address.”  The taxpayer disputed that they had moved, indicating that the address on the return receipt card was the correct address for delivery of tax-related mail, and that quarterly tax bills were also received at the address.  Furthermore, Ch. 91 requests from the assessor for prior tax years were received at the same address and timely responses were provided to the assessor.  In light of this contention by the plaintiff, the Tax Court denied the Township’s Ch. 91 motion stating “that it is more likely than not that the postal service erred when it marked the information request ‘moved, left no address’ and returned the request to the assessor.”

In the second case, Franklin Township filed a motion to dismiss an appeal for the taxpayer’s failure to pay taxes and municipal charges.  In Somerset Group Hospitality, LLC v. Twp. of Franklin, the taxpayer filed a timely direct appeal to the Tax Court of the 2015 assessment.  The Township however filed a motion to dismiss the complaint for plaintiff’s failure to pay local property taxes and municipal charges on the property for the first and second quarters of 2015.  Prior to the motion return date, plaintiff made a $10,000 payment towards its outstanding property taxes and satisfied plaintiff’s first quarter 2015 property tax in arrears.  Franklin Township however maintained that plaintiff must pay all taxes due for tax year 2015, including the second quarter 2015 taxes.

The Tax Court rejected the Township’s argument and ultimately denied the motion to dismiss.  The statute governing direct appeals to the Tax Court clearly states that a taxpayer is required to pay taxes “up to and including the first quarter of the taxes and municipal charges assessed. . .”  The Tax Court ruled that plaintiff had satisfied the tax payment requirement by paying its first quarter 2015 taxes and that the Township’s interpretation is contrary to the clear language of the statute.  A copy of the statute can be found here.

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Expert’s Comparable Sales Approach Rejected for Rental Property

In a recent trial before the Tax Court, a taxpayer’s appeal challenging the assessment was unsuccessful due to the taxpayer’s failure to overcome the presumption of correctness.  As mentioned many times on this blog, the burden of proving that the assessment is erroneous is on the taxpayer.  To overcome that burden, the taxpayer must present credible evidence before the Tax Court that raises doubt as to the validity of the original assessment.

In Kolker v. Chatham Borough, the plaintiff appealed the assessment of a two-family dwelling which was utilized as a rental property.  At trial, the taxpayer’s expert relied on the sales comparison approach to value the subject property, and provided comparable sales of other two-family dwellings utilized as rental properties.  The expert testified that the comparable sales were researched via online sites, and he confirmed the information with the municipal offices as to each sale.  The expert thereafter made the appropriate adjustments and reached a value conclusion as to the subject property.

The Tax Court raised an issue as to whether the comparable sales chosen by plaintiff’s expert were properties legally permitted to be used as rental properties.  The court was reluctant to accept the expert’s testimony as to the facts of the comparable sales given that the information was solely and primarily obtained through online sites.  In addition, the websites relied upon by plaintiff’s expert did not provide any of the income information regarding the rental properties.  Given that the comparable sales were all rental properties, an investor/purchaser of the property would have sought the potential rental income from the property prior to the purchase.  Without the income information, the court found the plaintiff’s expert’s comparable sales approach did not accurately reflect the market value of valid rental properties.  Suggesting that the income approach may have been more helpful, the Tax Court stated that “an analysis under the Income Approach to value may have been useful to corroborate the expert’s conclusion under the Sales Approach.”

Determining the highest and best use of a property is one of the first steps in valuation.  If one is to argue that the highest and best use of a property is to be a rental property, the comparable properties should fall in the same category.  However, if it appears, as it did in this case, that the use of the property as a rental may or may not be a legally permitted use, the court will be less reluctant to give much credence to the evidence.  Furthermore, using only the sales approach on an income-producing property turned out to be a fatal oversight by the plaintiff’s expert in this case.

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Failed Redevelopment Site Succeeds in Tax Appeal

Penns GroveProperty tax issues arise commonly when a property designated for redevelopment fails to become a reality as originally proposed.  In Seaboard Landing, LLC (“Seaboard”) v. Borough of Penns Grove (“Borough”), the Borough envisioned a redevelopment plan to revive a struggling commercial area along the waterfront on the Delaware River.  In 2003, the Borough issued final site plan approvals to 10-acres of vacant waterfront land (the “subject property”) owned at the time by Fenwick Commons, LLC.  The redevelopment plan which was later known as “The Riverwalk at Penns Grove” was designed to be a 191,000 square-foot, riverfront entertainment center with retail, dining, hotel and marina facilities overlooking the Delaware River.  To that end, the Borough rezoned the waterfront area, created marina districts, and sought necessary funding for the project by obtaining grants and loans from the State and the adoption of bond ordinances.  Today, a 30 feet by 770 feet walkway along the Delaware River and a bulkhead is the only visible achievement of “The Riverwalk at Penns Grove.”  The project came to a halt after the construction of the bulkhead and walkway in 2007, and the 10-acre vacant waterfront lot remains deserted to this day.  In 2007, Fenwick Commons, LLC sold the property to the plaintiff in the present matter, Seaboard Landing, LLC.

The issue at trial was the Borough’s omitted added assessments on the subject property for tax years 2007 and 2008, as well as the assessments for tax years 2011, and 2012.  Following the construction of the walkway and bulkhead in 2007, the Borough’s tax assessor placed an omitted added assessment prorated for the last two months of tax year 2007 ($208,333), and for the entire tax year of 2008 ($1,250,000).  When the average ratio is applied to the added assessment, the implied equalized value of the two-month prorated assessment for 2007 is $343,162, and $2,314,815 for the entire 2008 tax year.  A municipal-wide revaluation was undertaken in tax year 2009 which assessed the subject property at $3,363,100 which was the valuation challenged by Seaboard for tax years 2011, and 2012.

At trial, Seaboard and the Borough both presented expert testimony from a licensed real estate appraiser.  Both experts concluded that the subject property was over-assessed on all of the relevant valuation dates.  Seaboard’s expert relied on the cost approach and concluded that the true market value of the subject property was $876,000 as of October 1, 2011, the valuation date for tax year 2012.  Seaboard’s expert, however, provided no detailed analysis to find the true market value for purposes of the omitted added assessments for tax years 2007, and 2008 or for tax year 2011.  Instead, Seaboard’s expert testified that the value conclusion reached for tax year 2012 was the same for all prior years under appeal.  Meanwhile, the Borough’s expert applied the sales approach and concluded that the subject property had a true market value of $2,420,000 for the relevant valuation dates after the completion of the walkway and bulkhead, and a value of $1,820,000 for tax years 2011, and 2012.

The Tax Court judge rejected the net opinion of Seaboard’s expert that his value conclusion for tax year 2012 would apply to the prior years.  The court noted that the expert made no substantive analysis in his report to sustain such a finding.  Moreover, the expert’s own opinion contradicted his time adjustments to the comparable sales prices he used for tax year 2012 since the adjustments were based on market fluctuations.  The court also did not find the expert credible given that he opined that the bulkhead and walkway, which was constructed in 2007, depreciated 75% in value in just five years.

Nevertheless, the Tax Court reduced the challenged assessments for the tax years under appeal.  The court found that the sales approach utilized by the Borough’s expert was credible and more applicable for purposes of valuing vacant land.  However, the court found that the Borough’s expert gave too much weight to one sale and further misapplied that value to 12.12 acres when in fact it should have been 10.542 acres.  After correcting the adjustments and re-applying it to the correct acreage determined by the court, the added assessment prorated for tax year 2007 was reduced to $68,880, as well as tax year 2008 which was reduced to $314,300.  The assessments for tax years 2011 and 2012 were also reduced from $3,363,100 down to $1,460,000 and $1,475,000, respectively.

Rarely will a municipality prepare an appraisal report that concludes a value significantly much lower than the assessed value and take it to trial.  The failed redevelopment plan may have left a bitter taste with the Borough given that Seaboard had not made any repayments to the Borough for obtaining loans to build the bulkhead and walkway, and retreated on its intentions to redevelop the property.  However, there may yet be some hope for the Borough as the property was recently foreclosed, and a new owner and the Borough are discussing future plans to redevelop the waterfront property.

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South Plainfield’s Income and Expense Requests Ruled Defective

As discussed many times on this blog, Chapter 91 motions are frequently wielded by municipalities in hopes of dismissing tax appeals on income-producing properties.  However, given the extraordinary relief of dismissing a tax appeal, courts have consistently ruled that municipalities must fully comply with all the requirements of N.J.S.A. 54:4-34 (“Chapter 91”) in order to warrant dismissal.  One such requirement of the statute is that the request must be “both clear and unequivocal” so that the taxpayer may fully understand what financial information is being requested.  In three recent decisions (Wade Realty Co. v. So. Plainfield; Northeast Realty v. So. Plainfield; Sun Pharmaceutical Ind. v. So. Plainfield), the Tax Court denied a series of Chapter 91 motions filed by South Plainfield (“Borough”) finding that the Borough’s Chapter 91 requests were defective as being ambiguous in terms of the information that was being sought by the assessor.

The relevant facts in all three cases were identical .  In 2014, the Borough requested the income and expense information from plaintiffs via certified mail.  Plaintiffs in all three matters did not dispute the fact that they received the Chapter 91 request.  Plaintiffs also conceded that they  did not respond to the assessor’s Chapter 91 request.

Despite plaintiffs’ non-compliance with the assessor’s Chapter 91 request, the Tax Court found that nowhere on the Borough’s Chapter 91 requests was there an indication of the specific year or period for which the financial information was being sought from the taxpayer.  Although the Chapter 91 requests instructed that the taxpayer can use any form of accounting year, be it calendar, or fiscal, or “other acceptable year,” it failed to indicate exactly as to which year’s financial information was being requested.  To make matters more confusing, there was no indication as to which tax year’s assessment was to be determined based on the unspecified year’s financial information.  The Tax Court judge asserted that “[a]lthough the instant motion is for tax year 2015, and from the instant motion one can infer that the information was requested for use in setting the assessment for tax year 2015, the hindsight inference does not cure the total lack of clarity as to the year for which [plaintiff] was supposed to provide financial information.”

In Northeast Realty v. So. Plainfield, the Borough argued that the inclusion of the statute as part of the Chapter 91 request gave sufficient and clear notice as to which year’s income information was being sought by the assessor.  The Tax Court however found no merit in the argument stating “[a] plain (or even a painstaking) reading of the statute does not fairly provide the taxpayer with notice of which year’s income and expense information should be provided, and the Borough’s Chapter 91 request does not make it any clearer.”

Given that many municipalities churn out Chapter 91 requests like a mill every year, one particular defect on a Chapter 91 request is often duplicated on all of the municipality’s Chapter 91 requests.  In light of the error discovered by these decisions, South Plainfield will most likely revise their Chapter 91 requests going forward, so income-producing property owners seeking to appeal their assessments in the future are reminded not to ignore it.

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Credit agency watching hospital tax exemption case

When we last wrote about the recent decision by the New Jersey Tax Court that stripped Morristown Memorial Hospital of its property tax exemption we said that municipalities and other hospitals across the State would watch closely for the next move in this ongoing battle.  Most observers believe that the hospital will most certainly appeal, while at the same time, seek a legislative fix to win back its local tax exemption.  The impact of the ultimate outcome will certainly be felt across the State and the matter has drawn interest from not only other hospitals and municipalities but the bond market as well.

The Star Ledger reported earlier this week that Moody’s Credit Outlook declared the court’s decision to be “credit positive” for the Town of Morristown, noting that if unchanged, it will provide about $6.9 to the Town (approximately $2.3 million for the 2006 through 2008 tax years at issue in this decision). That sum represents about 18 percent of the Town’s budget for 2015.

In addition to the potential influx of cash that may result from this decision, Morristown will benefit further if its denial of the exemption for subsequent tax years is upheld. As for future years, the denial of the exemption could result in millions of dollars in new annual tax revenues. Like Morristown Memorial, New Jersey’s other 70 or so “non-profit” hospitals must be desperate for a cure top preserve their tax exempt status, while some of the host municipalities are salivating at the prospects of a financial windfall. Meanwhile the credit rating agencies are watching.

Moody’s statement is not an upgrade or an outlook change, but it does indicate the impact this decision may have as an important credit factor in determining a municipality’s debt rating. While this will not be a consideration by the Appellate Division on appeal or the Tax Court in future cases, it will certainly be a key consideration for legislators when the hospitals come calling for help.

A copy of the Star Ledger story may be found here.

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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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