On certification to the Appellate Division, Superior Court.
For reversal -- Chief Justice Wilentz, and Justices Clifford, Handler, Pollock, O'Hern, Garibaldi and Stein. For affirmance -- None.
In this appeal we must determine the proper method of assessing, under the capitalization of income approach, the fair rental value of a large well-managed apartment complex with one-year leases. The Tax Court ruled that the assessment should be based on the present potential rent of the apartments rather than the actual rent of the apartments as of the assessment date, 8 N.J. Tax 430 (1985), rejecting the taxpayer's contention that this method conflicted with our decision in Parkview Village Associates v. Borough of Collingswood, 62 N.J. 21 (1972). In Parkview, we held that "in the absence of convincing evidence to the contrary" actual rent in a large well-managed apartment complex with short-term leases is prima facie proof of economic rent. Id. at 34. The Appellate Division affirmed, 9 N.J. Tax. 199 (1986). We granted certification, 107 N.J. 66 (1986), and now hold that there is insufficient evidence in this case to overcome the Parkview presumption. Therefore, the judgment of the Appellate Division is reversed.
This appeal centers on the 1983 and 1984 assessments of a garden apartment complex located in the Township of Cranford (the municipality) and owned by Parkway Village Apartments Co. (the taxpayer). The following facts are undisputed: The apartment complex consists of nine two-story buildings, containing a total of one-hundred and fifteen apartment units. It is well-managed and all of its leases are for one-year terms. The taxpayer cannot increase the rents until the leases expire. A more detailed statement is contained in the Tax Court's opinion, supra, 8 N.J. Tax at 432-33, but the preceding facts are sufficient for this appeal.
For each year in question, the total assessment for the complex was $1,850,000, including land and improvements. Id.
at 433. Because the assessed valuation of the property exceeded $750,000, the taxpayer bypassed the Union County Board of Taxation and sought direct review of the assessment by the Tax Court. See N.J.S.A. 54:3-21. The court found that the parties had presented sufficient evidence to overcome the presumption of correctness accorded the original assessment. 8 N.J. Tax. at 434-35. After considering the testimony of the expert witnesses, the court determined that the appropriate method of assessment was the income approach, which is based on an analysis of rental income. Id. at 439; see also Helmsley v. Borough of Fort Lee, 78 N.J. 200, 214-15 (1978) (income method preferable for income-producing property).
Both the taxpayer and the municipality presented expert testimony. The taxpayer's expert testified that the actual rent charged for the apartments should be accepted as the economic rent. He multiplied the actual monthly rent for each apartment by twelve, an exercise that produced annual income of $540,840 for 1983 and $590,580 for 1984. The municipality's expert, however, "stabilized" the rent for each category of apartments by imputing to all apartments the most recent rent charged for an apartment of that category. He thereby calculated the economic rent to be $596,700 for 1983 and $648,580 for 1984.
In a period of inflation, such as the present, the most recent rent will also be the highest rent. Thus the municipality's expert valued all apartments at the highest rental for the category. For example, as of October 1, 1982, five of the sixty-eight five-room duplex apartments were renting for $450, and the remaining sixty-three apartments were renting for less. Nonetheless, the expert concluded that the economic rent for each five-room apartment was $450 per month. The effect of the municipality's expert's method of computation is illustrated in the following table, which sets forth the types of apartments owned by the taxpayer and the number of units rented at the highest level for each type:
Number of Units Rented Number of Units Rented
Total at Highest Level on at Highest Level on