MSGW Real Estate Fund, LLC v. Borough of Mountain Lakes

2030-1997 and 2080-1998 (Tax Ct. 1999) (Unpublished)
  • Opinion Date: March 22, 1999

TAXATION; ASSESSMENTS; APPEALS—The Court outlines how the burden of proof is allocated in a tax appeal and finds that the purchase price in a heavily negotiated sale by a less than motivated seller is not indicative of a property’s true value for tax assessment purposes.

At the outset of this real estate tax appeal case, the court concluded that the presumption of validity which attaches to a tax assessment functions as follows in the context of an assessment appeal: (1) the taxpayer must first overcome the presumption by presenting evidence that raises a debatable question as to the validity of the assessment; (2) if the taxing authority moves to dismiss at the close of the taxpayer’s proofs, the Court, must accept that evidence as true and accord the taxpayer all legitimate inferences from the evidence; (3) if the Court grants the dismissal motion, the appeal should be dismissed unless the taxing authority has asserted a counterclaim, in which event the trial continues with respect to the counterclaim; (4) if the Court denies the dismissal motion, at the conclusion of the trial, the Court should proceed directly to weigh and evaluate all of the evidence, and determine whether the taxpayer has demonstrated, by a preponderance of the evidence, that the assessment should be adjusted, and (5) in the absence of a motion for dismissal by the taxing authority at the end of the taxpayer’s presentation, the presumption of validity remains in the case through the close of all proofs. Consequently, if the taxing authority does not move to dismiss at the conclusion of the taxpayer’s proofs, then at the conclusion of the trial, the Court, before proceeding to decide the appeal based on weighing and analysis of the evidence, must first determine whether the presumption of validity has been overcome.

In this case, the subject property consisted of a two-story building on approximately 16 acres. The building included about 100,000 square feet of office space and 18,000 square feet of warehouse space. The taxpayer acquired the building in mid-1997 for $7,250,000. Prior to the sale, a broker had advised the prior owner that the value of the property was between $5,500,000 and $6,000,000. A real estate investor offered to purchase the property for slightly over $7,000,000, payable in cash, subject to a ninety day due diligence period. The seller, however, was asking $8,375,000. Before setting such a price, it had received an appraisal with values of $6,500,000 to an owner/user and $3,900,000 to an investor. This caused the owner to reduce its asking price. At closing, the former owner rented about 30,000 square feet of prime office space within the building, for its own use, at what appeared to be slightly below true market value. It was the only tenant. The Court accepted extensive testimony from appraisers as to the value of the property and also took into consideration the purchase price of the building. With respect to the sale, the Court concluded that the property was exposed to the relevant market for an adequate period of time and that sale satisfied the criteria for an arms-length transaction with two exceptions: (1) the seller was not typically motivated, and (2) the purchase price was affected by a special factor, namely, the vacant status of the building. Although the prior owner was not rushing to “dump” the property, it was an excess property nevertheless. This was evidenced by the seller’s unwillingness to undertake actions necessary to maximize market value, specifically, leasing-up the building, including the making of tenant improvements, before offering it for sale; and (2) its refusal to attempt to negotiate with another offeror that was willing to acquire the building together with furniture and fixtures for a total price above the final selling price. Consequently, the Court believed that it was entirely appropriate to utilize a significant square foot price adjustment to the subject sale to reflect a change from its vacant status, as of the sale date, to its 30% occupied status for tax purposes as of the valuation date. As a result, the Tax Court concluded the following: (1) the sale of the subject building did not reflect fair market value for tax assessment purposes and provided little guidance as to such value; (2) the sale comparison approach using sales by owner/users to owner/users, subject to the caveat set forth by the Court relating to the seller’s motivations, provided a meaningful indicator of the value of the subject property as of the valuation date; and (3) the sales comparison approach provided little guidance as to the value of the subject property for tax assessment purposes. In reconciling the conflicting testimony from appraisers, the Court attributed heavier weight to the income approach than to the sales comparison approach for two reasons. First, an investor would have been a more likely buyer of the property than an owner/user. Second, the sales on which the Court relied may have been influenced more by corporate decisions to dispose of excess properties than by real estate decisions to maximize property value. After reconciling the income and sales comparison approaches, and giving the sale of the subject property very little weight, the Tax Court concluded that the value of the office portion of the property was $8,200,000. It then added a $700,000 stipulated value attributable to the warehouse portion to reach a total of $8,900,000. A similar approach for a subsequent tax year resulted in a value of approximately $1,000,000 more.