On appeal from Superior Court, Law Division, Bergen County.
Allcorn, Seidman and Botter. The opinion of the court was delivered by Botter, J.A.D.
[170 NJSuper Page 168] The primary issue presented by this appeal is whether the Fort Lee Rent Leveling Board (Board) improperly disallowed
depreciation as an expense in calculating the rental income needed to give plaintiff a fair and reasonable return on her investment. In a prerogative writ action to review the Board's determination, the trial judge raised the "hardship increase" in rents granted by the Board from $3,364 to $12,000 a year, which was the sum requested in plaintiff's application, to take into account plaintiff's claim of $12,688 as a depreciation "expense." Defendants appealed from that portion of the judgment, and plaintiff cross-appealed, contending that in calculating fair return the Board erred in excluding as an operating expense the value of repair work allegedly performed by her husband.
On September 1, 1977 Robert C. Mead and Doris Mead filed an application with the Board for a hardship rent increase for 20 dwelling units owned by them*fn1 in a garden apartment complex on Myrtle Avenue, Fort Lee, consisting of three buildings. The application was filed pursuant to § 10 of Ordinance 74-32, as amended by § 2 of Ordinance 75-45 which provides "Criteria and Procedures" for obtaining tax surcharges and hardship increases.
The complex was constructed in 1961 and was purchased by Mr. and Mrs. Mead in 1968. The purchase price of $309,304 was paid by assuming mortgages and notes totaling $249,558, paying cash of $15,000 ($7,500 of which was for a real estate commission) and transferring other real property having an equity of $44,746. Thus, the landlord's initial investment in the property was $59,746. Amortization of the first mortgage, payment of a note and refinancing in 1973 by a new mortgage of $250,000 resulted in an "equity" of $71,422 as of December 31, 1976, the date used by the Board for its calculations. The Board treated the "equity" of $71,422 as the landlord's "total investment" in the property.
The Board determined that a fair rate of return would be "one percentage point above the constant rate of payment on the first mortgage, or 10.27%." The reasonableness of this rate of return is not questioned on this appeal. (Mead testified that a 10% return after expenses would be a fair return.) Applying the 10.27% rate of return to the landlord's "total investment" of $71,422, the Board found that the landlord was entitled to a return on investment of $7,335 per year.
The total income in 1976 from all sources (apartment and garage rentals and laundry room revenues) was $54,245.*fn2 In calculating the fair return the Board allowed $27,088 in operating expenses.*fn3 It disallowed as expenses the figure given for depreciation and the value claimed for repair services performed by Mead. However, applying the standard established by the ordinance, the Board allowed as a "finance cost" mortgage interest and amortization, totaling $23,184, as well as the return on investment of $7,335. Thus, operating expenses and the "finance cost" came to $57,607. Since the total income of $54,245 was $3,362 less than that needed to cover the sum of operating expenses, mortgage amortization and interest, and the fair return, plaintiff was entitled to a rent increase in that amount. Due to a small mathematical error the increase allowed was $3,364.
The Board's disallowance of the value of repairs made by Mead is the subject of the cross-appeal, which we will consider first. Mead testified that he made various repairs himself, such as replacing washers in faucets, replacing a switch on a sump pump, pumping out the basement and digging up a blocked drainage line. He estimated that he spent an average of eight to ten hours a week on repairs of this nature and that this work would have a minimum value of $7,000 a year if it were done by outside contractors. However, there was evidence to refute this claim. Although Mead said it would cost an average of $20 an hour to have the work done by contractors, he testified that he only made repairs that did not require "skilled professional help." Two tenants testified that they did their own repair work in their apartments, but it appears that repairs to air conditioners were made by a contractor. One of these tenants testified that he helped the building superintendent work on the boiler a few times. The superintendent rendered part-time service, cleaning halls and replacing light bulbs and the like, in exchange for an allowance in rent. Another tenant repaired the clothes washing machines, also in exchange for a rent allowance. There were no records submitted to substantiate the claim for Mead's labor.
The expenses allowed by the Board set forth in note 3 above include $1,988 for plumbing and electrical repairs performed by contractors in 1976, as well as an expense for "decorating, maintenance and supplies." (The tenants must paint their own apartments.) The Board also allowed a fee of 5% of the rental income from apartments and garages for management services performed by Mead although this was not actually paid to him by plaintiff. However, no allowance was made for Mead's repair work.
On appeal to the Law Division the trial judge affirmed the disallowance of this claim. He found that the Board's decision in this respect was not arbitrary and unreasonable. We, too, find that the Board could reasonably have concluded
that plaintiff did not satisfy her burden of proof as to this item of expense in that the evidence did not permit the Board to assess the value of Mead's occasional repair work with sufficient accuracy. Therefore, on plaintiff's cross-appeal, we affirm the decision below. See State v. Johnson , 42 N.J. 146, 162 (1964); Mayflower Securities Co., Inc. v. Bureau of Securities , 64 N.J. 85, 92-93 (1973).
We now reach the issue of depreciation. Plaintiff claimed as an expense $12,688 for depreciation of the buildings, parking lot, roof, heating unit, air conditioners, refrigerators and stoves. The depreciation was calculated on a straight-line basis using an initial total cost of $305,000, $45,000 of which was allocated to the cost of the land and $260,000 to depreciable items, namely, the buildings ($221,860) and the remaining components ($38,140). The buildings were assumed to have a total life of 33 years, with 25 years remaining after they were purchased by plaintiff. The other components were assigned a life of ten years each. No evidence was offered as to the age of the other components, but we know the apartments were first occupied in 1962. To emphasize the hypothetical nature of the depreciation figures that were proposed, we note that on plaintiff's income tax returns depreciation was based on a 25-year life for the building and all components, and an accelerated method was employed to yield a higher rate of depreciation in the early years and a declining rate over the balance of the assigned life of the property.
The Board gave no reasons in its written decision for rejecting depreciation as an expense. However, during the hearing the Board's chairman advised plaintiff's attorney that Fort Lee's ordinance "doesn't allow for payment for depreciation." His explanation was given in the following exchange:
MR. LITT: Well, I don't know anything in the ordinance that says that depreciation is not allowed. I understand that the Board's interpretation of the ordinance is such as not to allow depreciation.
THE CHAIRMAN: No. The ordinance is pretty distinct. It sets us up to go on a cash flow basis. In other words, we're ...