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City of Atlantic City v. Ace Gaming, LLC

23 N.J. Tax 70 (2006)

TAXATION; CASINOS — A gambling casino is a limited-market property whose real estate tax assessment is to be calculated in a special way that extracts the business value and isolates the value of the real property.

A casino challenged its tax assessments for years 1996 through 1999. In 1996, the entire casino industry in the area experienced a decline in revenue, in part due to harsh weather conditions. This particular casino was particularly hard hit; it never rebounded from the revenue decline. As a result, in 1998, the casino filed for bankruptcy protection.

For tax year 1996, the casino filed an appeal with the county board of taxation. After a hearing was held, the board issued its judgment reducing the subject property’s overall assessment. The municipality appealed to the Tax Court seeking review of the board’s judgment. The casino then filed its own appeal with the Tax Court also challenging the judgment

For tax year 1997, the casino filed a tax appeal with the board. The municipality filed a direct appeal with the Tax Court seeking to increase the assessment. In response, the casino filed a counterclaim. The appeal before the board was eventually dismissed, leaving the Tax Court to determine the 1997 appeal.

For tax year 1998, after first filing for protection earlier that year under the Federal Bankruptcy Act, the casino commenced an adversary proceedings in the bankruptcy court challenging its 1998 tax assessments, and removed the pending 1996 and 1997 appeals to the bankruptcy court. Upon application of the municipality, the bankruptcy court abstained from exercising jurisdiction over the adversary proceedings and transferred all three matters to the Tax Court.

For tax year 1999, the casino filed a direct appeal to the Tax Court and the municipality filed a counterclaim.

For the trial, the casino and the municipality each engaged the services of its own professional real estate appraisers to provide opinions of value of the subject property for each of the tax years in dispute. The casino expert relied solely upon the income approach. The municipality’s expert relied primarily upon the income approach and cross checked it by the market approach. Neither expert used the cost approach to value.

This was a case of first impression. Since the inception of legalized casino gambling in the municipality, no published case had addressed the issue of how to value a casino hotel for tax assessment purposes.

The Tax Court examined the case law in other state courts, in New Jersey courts, and in the federal courts for insight as to the valuation of casino hotels for tax assessment purposes. Upon that review, the Tax Court noted several findings.

First, the Tax Court found that casino hotels were limited-market properties. It explained that a limited-market property is a property that has relatively few potential buyers at a particular time. The Tax Court noted this was not to mean that limited-market property had no market value. In contrast to a limited-market property, a special-purpose property was a limited-market property with a unique physical design, special construction materials, or layout that restricts its utility to the use for which it was built. Accordingly, in light of the expert testimony and case law, the Tax Court found that casino hotels were limited-market properties, but not special purpose, use or design properties.

Second, the Tax Court found that casino hotels were not conventional hotels. The Tax Court discussed how the nature of the casino industry differed vastly from that of conventional hotels. The Tax Court noted the significant financial disparities: unlike hotel properties which can generate 60% to 99% of its income from the rental of rooms, casino hotels derive more than 90% of its income from gaming and derive less than 5% to 10% of its income from the rental of rooms. Further, the Tax Court noted that cash flow in casino hotels was derived from short-term transactions, explaining that revenue and profits in a casino hotel were far more volatile than in a conventional hotel. Accordingly, the Tax Court found that a casino hotel was not a conventional hotel.

In its analysis of the question presented, the Tax Court stated that there was a presumption of correctness in favor of the board’s 1996 judgment, which could be overcome by sufficient competent evidence of true value of the property. Similarly, there was a presumption of validity that attached to the 1997, 1998, and 1999 assessments.

Next, the Tax Court considered the case law of New Jersey courts and other state courts in determining the appropriate approach to taken when valuing a casino for the purposes of tax assessment. Specifically, the Tax Court weighed the merits of three approaches: the income approach, the sales approach, and the cost approach. The Tax Court preferred to have had all three approaches to value, given the novelty of the issue. However, because the Tax Court found that the sales approach of the municipality’s expert to be insufficient to determine value, and the cost approach was denied to the Tax Court under agreement of the parties, all that remained were the income approaches proffered by each party’s expert. The Tax Court decided to substitute its own judgment for that of the respective parties, but was persuaded by the approach proposed by the municipality.

The municipality noted that the challenge in valuing a casino hotel is extracting the business value from the hotel’s going concern value produced by capitalization of the casino’s hotel income. The municipality had suggested that the Tax Court rely on and adopt the “Rushmore method” to extract the business value and to isolate the value of the real property in a going concern. The Rushmore method treats all payments to the entity that manages and operates the hotel as business income. The method excludes these payments in the computation of realty income subject to capitalization. Additionally, the method excludes the portion of the overall income realized by the employment of furniture, fixtures, and equipment since those items are generally considered personal property rather than real estate. Lastly, the method makes separate adjustments to provide for periodic replacement of the personal property and also to provide a yield on the investment in personal property.

The Tax Court pointed out that there were primarily three contentions advanced by the casino as its justification for a reduction of each year’s tax assessment , and rejected two of them for lack of support in the record. The remaining contention was that the casino was a well managed casino hotel. However, based on the testimony of witnesses, the Tax Court found that the casino was poorly managed during the tax years under appeal.

Having rejected the casino’s arguments for reducing its tax assessment, the Tax Court concluded that it could not accept the opinions of value offered by the casino’s expert because they were substantially predicated upon facts and conclusions that the court had rejected. Further, it found the municipality’s expert to be a more reliable and to have presented a well founded basis for determining value under the income approach. The Tax Court then calculated the value of the casino for each of the tax years under appeal.


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