On appeal from the Tax Court whose opinion is at 8 N.J. Tax 382.
Furman, Brody and Scalera. The opinion of the court was delivered by Furman, P.J.A.D.
[220 NJSuper Page 513] Plaintiff taxpayer appeals from a Tax Court judgment entered on direct review pursuant to N.J.S.A. 54:3-21. That judgment affirmed an assessment of $1,050,000 on the taxpayer's
garden apartment complex for the tax year 1984. The Tax Court opinion is published at 8 N.J. Tax. 382 (1986).
On appeal before us, the taxpayer raises two issues: that the Tax Court established economic rent at an excessively high level; and that the Tax Court improperly denied discriminatory relief, because actual taxes and not the effective tax rate should have been used when testing for discriminatory assessments. We agree with the taxpayer's argument on the first issue and disagree with its argument on the second issue. We reverse and remand for further proceedings not inconsistent herewith.
The thrust of the taxpayer's first argument is that economic rent should not have been calculated by adding a two and a half percent inflationary factor to the actual rent. Actual rental income annualized from the rent rolls on the assessment date, October 1, 1983, was approximately $790,000. The Tax Court judge determined economic rent as two and a half percent more or approximately $810,000; he accepted the municipality's expert's opinion that a putative purchaser of the taxpayer's property would pay an enhanced purchase price on the strength of the automatic rent increase provision of the municipality's rent control ordinance. Under the ordinance, taxpayer landlords were entitled to rent increases in accordance with the percentage rise in the Consumer Price Index (CPI) but not exceeding five and a half percent.
The municipality's expert, "[l]ooking at the CPI over a period of time," considered that two and a half percent was a "safe" projection of the CPI rise to be reasonably anticipated. Increased costs attributable to inflation predominate in CPI rises, see Troy Hills Village v. Parsippany-Troy Hills Tp. Council, 68 N.J. 604, 631, fn. 11 (1975). But the municipality's expert's approach was unbalanced; he took no account of inflation in his estimates of expenses of operation of the taxpayer's garden apartment complex, except to note that electrical costs, in common areas apart from rental units, a minor item, were
rising and to incorporate "a very minor" increase in wages and payroll. He also noted a downward trend in fuel oil prices. Otherwise he "stabilized" expenses based on operating statements.
Decisional law support, chiefly dicta, for the enhancement of actual rent by two and a half percent is in Fort Lee v. Invesco Holding Corp., 3 N.J. Tax. 332, 342 (1981), aff'd as to true value, 6 N.J. Tax. 255 (App. Div.1983), certif. den. 94 N.J. 606 (1983); Berenson v. East Orange, 6 N.J. Tax. 12, 19 (1983), aff'd o.b. 6 N.J. Tax. 493 (App.Div.1984); Inwood at Great Notch v. Little Falls Tp., 6 N.J. Tax. 316, 332-333 (1984); and Parsippany Hills Assoc. v. Parsippany-Troy Hills, 1 N.J. Tax. 120, 122-123 (1980). As stated in Parsippany Hills, "a prospective purchaser's primary concern is with the anticipated return on his investment." The result in the foregoing cases except Berenson was a denial of any adjustment to actual rent based upon future earnings, generally because such a projection was not "reasonably foreseeable" on the assessing date. See also New Brunswick v. State of N.J. Div. of Tax Appeals, 39 N.J. 537, 545 (1963).
Among the cases relied upon by the municipality, only Berenson upheld a premium added to actual rent in the calculation of economic rent. Local rent control had been preempted by the United States Department of Housing and Urban Development (HUD). As of the assessing date, substantial rent increases had been imposed for some apartments and were projected for the balance of the apartments upon the expiration of one-year leases. In postulating economic rent equal to the HUD preemption level, the Tax Court judge stated:
Notwithstanding plaintiff's vigorous denial of its ability to achieve the HUD preemption level, plaintiff's project manager declared unequivocally, in a letter to HUD-Newark, his intention to increase the apartment rents to the prescribed level in two annual increments. This state of facts, and not merely the actual rents in effect on October 1, 1980, would be of paramount importance to the putative purchaser, who could reasonably expect an early, full implementation of the HUD preemption level by ...