On certification to the Superior Court, Appellate Division.
For reversal and remandment -- Chief Justice Wilentz and Justices Clifford, Handler, Pollock, O'Hern and Garibaldi. For affirmance -- None. The opinion of the Court was delivered by Garibaldi, J.
[99 NJ Page 269] At issue here is the 1980 real property tax assessment of a garden apartment development located in Wall Township. The appeal concerns the issues involved in valuing a commercial building under the building residual technique as an application of the income approach to value (building residual technique). Specifically, we review the Tax Court's decision, which rejected the taxpayer's expert's (1) use of the assessed value of the land divided by the Chapter 123 ratio to determine the market value of the land, (2) use of stabilized actual rent to determine economic rent, and (3) use of rates of return on alternative investments to determine the capitalization rate. In addition, we examine whether the Tax Court should have considered the sale of the property within three months of the assessment date as an indicator of its value. Subsumed in these issues are the practical and realistic ends to which the Tax Court should expect an expert to go to support his opinion, in view of the costs to the parties and the judicial system.
The original assessment of the Glen Wall Heights Garden Apartment Development for the tax year at issue was:
The property consists of approximately 6.5 acres, upon which five two-story brick and frame garden apartment buildings have been constructed. The buildings, which were constructed in the early 1960's,*fn1 are generally in good condition and the neighborhood has other similar garden apartment developments. The property has no garages but there is ample open parking on the premises.
The complex contains 78 units; 58 apartments have 3 1/2 rooms and 20 have 4 1/2. In January of 1980 the monthly rents ranged from $219 to $275. As of October 1, 1979, the critical assessing date, each tenant had a one-year lease, was provided with heat, water, and cooking gas, but paid for his own electricity. Laundry equipment was provided on the premises on a concession basis. There was no rent control in Wall Township.
Glen Wall Associates (Glen Wall) acquired the property on December 20, 1979 for $1,375,000. The purchase price consisted of a cash payment of $323,000, the assumption of a six-percent mortgage of $352,000, and a purchase money mortgage of $700,000 at six and one-half percent which escalates to ten percent by 1987. Neither mortgage contained a personal guarantee of the purchaser.
After unsuccessfully challenging the assessment of its property before the Monmouth County Board of Taxation (Board), Glen Wall filed a complaint with the Tax Court seeking review of the Board's judgment. The Tax Court affirmed the original assessment. Glen Wall Assocs. v. Wall Township, 6 N.J. Tax. 24 (1983). The Appellate Division affirmed substantially for
the reasons stated in the Tax Court opinion. 6 N.J. Tax. 448 (N.J. Super.A.D.1984). We granted the taxpayer's petition for certification. 97 N.J. 661 (1984).
In challenging the Township's assessment Glen Wall's expert used the building residual technique to arrive at a market value of the property in 1980 of $918,000, and an assessed value of $468,200. The building residual technique is an acceptable method of appraising income-producing property. Fort Lee v. Hudson Terrace Apartments, 175 N.J. Super. 221 (App.Div.1980), certif. den., 85 N.J. 459 (1981); Middlesex Builders v. Township of Old Bridge, 1 N.J. Tax. 305 (1980); American Institute of Real Estate Appraisers, The Appraisal of Real Estate 42, 50 (8th ed. 1983). Under this technique the value of the land is ascertained and a portion of the net operating income of the property is attributed to it. The residual income that is attributable to the improvements is capitalized and a value is determined for the improvements. The value thus determined for the improvements is added to the land value and a total value for the property is ascertained. Glen Wall Assocs., supra, 6 N.J. Tax. at 28-29 (citing American Institute of Real Estate Appraisers, The Appraisal of Real Estate, 405-06 (7th ed. 1978). Specifically, the taxpayer's expert applied the building residual technique as follows:
1. He determined the market value of the land to be $200,000 (he accepted Wall Township's assessment of the land at $102,300 and divided it by the Chapter 123 ratio*fn2 of 51%);
2. He ascribed $24,940 of the net operating income of $132,426 to the land by setting a capitalization rate for the land of 12.47 (10% return 2.47% effective tax rate);
3. He attributed the remaining income of $107,486 to the improvements;
4. He capitalized the income earned by the improvements at 14.97% (10% return 2.50% recapture 2.47% effective tax rate = 14.97%) to set their market value at $718,000;
5. He added the market value of the improvements to the market value of the land to arrive at a market value for the entire property of $918,000; and
6. He multiplied the market value of the property by the Chapter 123 ratio of 51% to arrive at an assessment of $468,200.
In valuing the property the Township's expert utilized the economic approach, supported by comparison sales. He arrived at a market value as of October 1, 1979 of $1,326,500. The Township's assessment of $744,600, 56% of value, exceeds the 1980 Chapter 123 ratio of 51% but is within Chapter 123 limits.
In applying the building residual technique an expert must first determine the market value of the land. As noted, the taxpayer's expert determined the market value of the land by accepting the land assessment of $102,300 and dividing that assessment by 51%, the Chapter 123 ratio.*fn3
The Tax Court held that "it is not acceptable nor appropriate to divide the land assessment by the Chapter 123 ratio to determine the land value. Brick Assocs. v. Brick Township., 4 N.J. Tax. 510 (Tax Ct.1982). Such a methodology for valuation is not a substitute for proper appraising practice." Glen Wall Assocs., supra, 6 N.J. Tax. at 29. Thus the Tax Court held that an expert, in utilizing the building residual technique, may ...