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West Colonial Enterprises, LLC v. City of East Orange

A-1950-02T5 (N.J. Super. App. Div. 2004) (Unpublished)

TAXATION; VALUATION—Economic rent, also known as market rent or fair market value, may differ from actual rent received, and it is economic rent that must be used when valuing a property for tax assessment purposes.

A property was assessed at $651,300. The property owner appealed to the County Board of Taxation, where the appeal was dismissed without prejudice, leading to an appeal to the Tax Court. During a trial, an expert witness for the owner used the income capitalization approach to calculate that the potential gross income (PGI) for the property ranged from $1,015,000 to $1,040,000. He reviewed the rent roll and annualized the monthly rentals without considering rent loss or vacancies. He then increased the actual rental incomes for the years in question by four and five percent to account for rent control regulations. Next, he took the actual rental incomes for the years in question, which he considered to be the effective gross income (EGI), and calculated a difference of approximately seventeen percent. He stated that seven percent was due to vacancy, and the remaining ten percent due to collection loss.

The Tax Court dismissed the appeal, believing that the owner had failed to overcome the presumption of validity of the assessment. That presumption must be overcome for a taxpayer to prevail on a tax assessment challenge. The Tax Court does not determine the true value of the property where the presumption has not been overcome. The Appellate Division affirmed the Tax Court’s decision, holding that it had correctly disallowed the taxpayer’s expert opinion because it was based on a methodology that had been expressly rejected in an earlier case. Thus, without a valid expert’s opinion, the taxpayer could not meet its burden.

The expert’s valuation method was flawed for three reasons. First, the value of the actual rents used to calculate the EGI was based on the rents as of the end of both years in question. The correct dates to use should have been the beginning of each of the years. Second, the expert’s computations of the PGI and the EGI were based on actual, and not market rate, rent. Third, he calculated a vacancy and collection loss allowance by using an unorthodox method, leading to an incorrect outcome. EGI can be the actual income from all operations of the subject property, adjusted for vacancy, provided that the actual rent is deemed to be “economic rent,” also known as the “market rent” or “fair rental value.” However, economic rent may differ from actual rent. Thus, it is necessary to check actual income to determine whether it reflects economic income. This requires a comparison of rents charged for comparable facilities in a competitive market. The expert failed to make such a comparison.

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