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Westwood Lanes, Inc. v. Garwood Borough

24 N.J. Tax 239 (2008)

TAXATION; VALUATION — For purposes of real estate tax assessments, entrepreneurial profit is a component of the market value of custom-built properties and the absence of adequate parking constitutes functional obsolescence which can result in a downward adjustment of what would otherwise be a property’s assessed value.

A catering facility challenged its tax assessment. The catering facility and the municipality each retained experts to calculate the property’s value. Both experts relied on a “cost approach” to value. The catering facility’s expert did not include “entrepreneurial profit” as a factor in measuring the property’s value, whereas the municipality’s did. Entrepreneurial profit is a measurement of the profit a property owner would receive for its renovations to the property in anticipation of a resale and the associated risk. The catering facility’s expert claimed that there was no entrepreneurial profit to be inferred for the property since it was custom-built as a catering hall and catering facilities are not constructed with the expectation of resale profit. The Tax Court rejected the catering facility’s argument, finding that the catering facility’s location in an expanding commercial district gives rise to an inference of entrepreneurial profit. Therefore, the Tax Court found it reasonable to conclude that renovations made to the property were made in anticipation of realizing a profit when the property was resold. Since the catering facility did not calculate entrepreneurial profit, the Tax Court relied on the municipality’s calculation instead.

The Tax Court then reviewed the competing calculations for factual obsolescence. Functional obsolescence is a measure of calculating the diminution in value of a property that is caused by a flaw in the structure, materials or design of the property, when compared with its best use and most cost-effective design. Functional obsolescence may be curable or incurable. In this instance, the catering facility was functionally obsolete because it lacked sufficient parking. However, insufficient parking may be cured by either leasing or purchasing a neighboring property, as the catering facility did when it leased the neighboring property. When valuing the diminution in a property’s value due to functional obsolescence, one can calculate it using either a replacement cost method or a reproduction cost method. However, in this case, the catering facility calculated the diminution in value due to functional obsolescence by deducting the cost of purchasing the neighboring property. The Tax Court found that the catering facility’s calculation made no sense because the parking deficiency counted for more than a thirty-three percent diminution in value. It made little sense that the property, if used as a catering hall, would be worth about $1,800,000 less than its worth for a different purpose. In addition, the Tax Court found illogical that prior to its owner buying a property for a parking lot, the catering facility property would be worth about $3,000,000, but that after buying the adjoining property, its property would be worth about $4,800,000, and, in addition the catering facility would then own the adjoining property valued at about $1,650,000.

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