Case Law Summaries

Brae Associates v. Park Ridge Borough

• Opinion Date: March 6, 2001
• Real Property Law
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TAXATION; VALUATION—When using a cost-approach for valuation, it is proper to exclude “entrepreneurial profit” as a factor in the property’s development costs.

A commercial property was developed to house a single tenant under a twenty year lease. Although the building was specially designed for this sole tenant, it was constructed so as to allow future modification for multi-tenant use. The municipality assessed the property as if it were a multi-tenant building and the owner sued. The tax court concluded that the highest and best use of the property was that of a “single user corporate headquarters” and not as a multi-tenant facility. It also concluded that the cost-approach was the only reliable method of valuing the property. Accordingly, it revalued the property for each of the preceding five years. The municipality appealed and the owner cross-appealed. The Appellate Division began by recognizing that a “municipality’s assessment is entitled to a presumption of validity,” and “to overcome the presumption, the taxpayer must present sufficient competent evidence to prove a true valuation different from the assessment.” Further, “[o]nce the tax court finds that the presumption has been overcome by cogent evidence, it must independently determine true value.” The Appellate Division concluded that the lower court made a determination that the owner met its burden of overcoming the presumption of correctness despite the lower court’s establishment of specific findings or conclusions to support it. The Court also found that there was no error in the valuation method used by the lower court, reasoning that the lower court could use certain evidence and reject other evidence in its analysis. In particular, it concluded that the tax court judge properly excluded “entrepreneurial profit” as a factor in the property’s development costs. Reasoning that the “proper use of the cost approach requires, not a mechanical addition of 10 percent for entrepreneurial profit, but a critical analysis of the property in its market on the appraisal date to determine whether cost should be adjusted upward or downward and to take account of market conditions.” The Court also rejected the municipality’s argument that the tax court judge improperly permitted a 2.5 percent annual cumulative deduction for physical and functional depreciation. In essence, the municipality argued that a deduction for “functional obsolescence” was improper. The Appellate Division rejected this argument holding that the deduction was associated with physical depreciation of the building components and not economic obsolescence.

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