For reversal and remandment -- Chief Justice Weintraub, Justices Jacobs, Hall and Mountain, and Judges Conford and Sullivan. For affirmance -- None. The opinion of the Court was delivered by Conford, P.J.A.D., Temporarily Assigned.
This is a tax appeal involving an assessment for the year 1968 (assessing date October 1, 1967) of petitioner's large apartment house complex in Collingswood, Camden County. The property consists of four buildings, two of nine stories and two of ten, containing 1,036 apartment units, commercial space and a garage. The assessments (based upon a 50% common level factor), which are separate for each of the four building lots, aggregate $177,500 for land and $4,937,650 for improvements, or a total of $5,115,150 (true value, $10,230,300).
The Camden County Board of Taxation affirmed the assessments while the State Division of Tax Appeals reduced them on appeal to an aggregate of $5,058,500 (true value, $10,117,000), or a reduction of $56,650, all on improvements. The Appellate Division affirmed the judgment. On application of the taxpayer this Court granted certification. 60 N.J. 467 (1972).
Determination of this appeal will not require extended consideration of all the factors relied upon by the two experts for respondent and the single expert for petitioner, in arriving at their valuations given in testimony at the hearing, or of those used by the Division judge in his determination. Although each of the experts submitted alternative valuation methods to support their conclusions, all agreed, and the Division concurred, that the income approach should be of preponderant influence in this case, and we are in accord. The core issue is the justification for the estimate by respondent's witnesses of the fair rental value ("economic" rental
income) of the property by adding 20% to the contract rental scale as of the assessing date, and for that of the Division in applying a 15% appreciation factor thereto, in arriving at their respective determinations of capitalization value. Although there were variations as among the experts and the Division judge as to the other significant factors employed in capitalizing net income, and petitioner complains of the figures used by the Division in some of these respects, the controlling issue presented relates to the matter of economic rental value of the property.
The discussion should be prefaced by the precautionary note sounded by the Chief Justice in the seminal case in this field -- New Brunswick v. State of N.J. Div. of Tax Appeals, 39 N.J. 537, 544 (1963) -- as to "the care with which the income method must be used" and "that one should hesitate to accept its answer without checking against all available data." These observations are peculiarly apposite in this case.
Bate, petitioner's only expert witness, arrived at a total valuation for the property of $8,341,400 through the capitalized income approach. For this purpose he took the contract rental scale as of February 1, 1968 (apparently the taxpayer's fiscal accounting date) and projected that to a full occupancy basis for a total gross apartment income of $1,521,348. (There was also minor income from commercial facilities.) He deemed that figure appropriate because "more in line with economic rentals" than any 1967 scale. In arriving at net rental income one of his deductions was a vacancy factor of 3%, although actual vacancy was somewhat less.
Bate was of the view that there were no other comparable high rise apartments against which to check Parkview rental values. In reference to the Cherry Hill apartments resorted to by the opposing experts for this purpose (see infra), he thought they were "newer and much more modern and more expensive in category with a different type of tenant."
Olasin, respondent's first expert witness, testified that these buildings were completed in 1950 and had a present
value on the capitalized income approach of $10,280,000. He thought the only apartment house "anywhere near comparable" to the subject property was a two-building complex in Cherry Hill completed in 1957 on Route 38 across the highway from the massive Cherry Hill Shopping Mall. These apartments are twelve stories high, contain 430 dwelling units and have universal air-conditioning and a swimming pool. The Parkview apartments have neither, but are adjacent to two public parks. Moreover, Olasin conceded that Cherry Hill was nationally known and considered a more prestigious address for an apartment in the Camden area than Collingswood. But there was "terrific turnover" of tenancies in the Cherry Hill community as compared with the "low turnover" characteristic of the Collingswood area. The compared complexes are four to five miles apart, but Olasin deemed Parkview to have better public transportation to nearby Camden and Philadelphia.
Olasin compared the projects from a rental value viewpoint, giving Cherry Hill a 10% preferential factor for prestige and status and 5% for amenities. He gave Parkview a similar factor of 10% for location and accessibility, but rated both projects equal for services. He thus concluded that Cherry Hill had a net 5% higher fair rental value than Parkview. He then purported to compute the square footage of rentable apartment space in each complex and to arrive at an annual square foot rental unit value for each, showing $2.31 for one of the Cherry Hill buildings and $2.25 for the other. Discounting these by 5% yielded an adjusted average Cherry Hill unit value of $2.14 which Olasin concluded was what Parkview should be economically renting for. Since his computed Parkview figure was only $1.79 per square foot, the witness concluded that Parkview's "economic rent" was 20% more than its contracted rental scale and that the latter should be increased by the stated percentage for purposes of capitalizing net income. Although Olasin conceded that rents in both apartments rise with the
height of the floor of the apartment, he made no adjustment for the difference in heights of the complexes under comparison.
In his deductions for arriving at net income Olasin applied a vacancy factor of 5%.
As a subsidiary basis for his conclusion as to Parkview's economic rental value Olasin noted the low vacancy experience of Parkview (conceded to average 1 1/2%) and said that fact showed the rents were too low. Cross-examined as to why the high vacancy rate (10%) at the Cherry Hill apartments should not with equal or greater logic have indicated that the rentals charged there were too high, Olasin stated, without furnishing particulars, that management at Cherry Hill had been poor.*fn1
Todd, respondent's other realty expert, testified to a capitalized value of $10,200,000. He subscribed fully to Olasin's square foot unit comparison of rental values of Cherry Hill and Parkview. Primarily on that basis he also added 20% to the rentals contracted for as of February 1, 1968 for purposes of arriving at the economic rental value of the property. In his deductions Todd allowed for a vacancy factor of 4%.
Todd, like Olasin, cited the low vacancy experience of Parkview as evidence of inadequate rentals. He pointed out that as an F.H.A. financed project this complex had been subject to government restrictions on rent increases until 1961, when there was a refinancing. He implied that the management never caught up ...