This is Chapter Two*fn1 in the on-going saga among various landlords and their protected tenants*fn2 arising out of actions by the Rutherford Rent Board ("board") limiting the allowable local property tax surcharge imposed by plaintiffs against defendants. Here, landlords seek a reversal of a decision of the board which permitted a 17% increase in the tax surcharges to be passed through to, and to be paid by, the protected tenants. Plaintiffs claim that the 17% increase is confiscatory, arbitrary,
capricious, unreasonable, and contrary to the local rent-control ordinance.
The precipitating event which triggered this action was the implementation of the 1988 local property tax revaluation by the Rutherford tax assessor. This resulted in an increase in the plaintiffs' local property tax liability ranging from 55% to 145%. Plaintiffs were prepared to pass these increases along to their tenants in accordance with the local ordinance until thwarted by the decision of the board in the Summer of 1988. This action in lieu of prerogative writs was initiated to overturn the board's action and to declare the amount and manner of calculating allowable tax surcharges following Rutherford's first revaluation since Litt v. Rutherford Rent Board, 196 N.J. Super. 456, 483 A.2d 239 (Law Div.1984).
PROCEDURAL POSTURE OF THE ACTION.
As a result of Litt, supra, landlords in Rutherford were obligated, pursuant to section 83A-7(A) of the Rutherford rent-control ordinance, to eliminate from their tax surcharge computations, all local property taxes imposed as a result of a conversion from rental to condominium or cooperative ownership. For plaintiffs, this meant that in each post-conversion year, the board gradually increased the allowable tax surcharge based upon the formula validated by Judge Evers: multiply the current year's tax rate by the assessment of the year prior to the conversion.
The board acted "informally" in each post-conversion year -- not as a result of either a formal application by a landlord or an appeal by a tenant -- and set the allowable surcharge, which has not been heretofore contested until the instant action.
In July 1988, apparently as a result of informal complaints by some defendants, the board conducted a hearing to inquire as to the appropriate tax surcharge for 1988. As a result of the revaluation, the old formula of multiplying the 1988 tax rate by the pre-conversion assessment was obviously of little utility. At the hearing, two "experts" testified and gave entirely inconclusive
testimony regarding the amount of taxes owed by plaintiffs which were attributable to the conversion of the properties. Other witnesses testified, including some of the parties to the instant action, but the board was frustrated in its attempt to clearly quantify the amount of taxes solely attributable to the conversions.
Instead, under the guise of making "policy" the board acted in what can most charitably be characterized as an "equitable mode," and set the allowable tax surcharge at 17% of plaintiffs' increase, which percentage represented the percentage increase in Rutherford's local property tax requirement between 1988 and 1987.
Plaintiffs commenced this action in August 1988. A trial based upon stipulated facts was conducted on May 17, 1989. No live testimony was presented, although both parties were given the opportunity to produce witnesses.*fn3
Plaintiffs are the owners of residential rental units in the Borough of Rutherford. Some own shares in a cooperative apartment corporation known as Hastings Village, Inc. and one owns nine condominium units in a condominium regime located at 155 Union Avenue. All of these units are rented to tenants who have been accorded protected status pursuant to the Senior
Citizens and Disabled Protected Tenancy Act, N.J.S.A. 2A:18-61.22 et seq.
In 1983, as a result of the decision of Judge Evers in Litt, supra, the board was sustained in precluding landlords in Rutherford from including within their otherwise permitted tax surcharges to tenants that portion of the taxes which represented a "cost" of their conversion from a pure rental form of ownership to a cooperative form of ownership. The cooperative apartment complex involved in the instant litigation was the subject of Litt, supra.
The operation of the Rutherford rent-control ordinance allows a landlord to impose and collect an annual tax surcharge from its tenants based upon a simple formula: Annual tax surcharge per room= (present property tax minus 1973 property tax) divided by number of rented rooms.
This simple formula was altered by the decision in Litt, supra, where landlords were precluded from including in the "present property tax" any amount that represented "conversion costs." Unfortunately, neither the board nor Judge Evers made an independent finding of the amount of the 1983 taxes which was solely attributable to the conversion, yet a review of the undisputed facts reveals that such component was readily ascertainable. The board, however, after 1983, chose not to distill the "conversion costs" from the 1983 taxes, and instead used the expedient method of simply multiplying the current tax rate by the pre-conversion assessment as part of the determination of the permissible tax increase for each year after the year of conversion. When 1988 arrived, however, the board was confronted with the conundrum of applying a substantially lower tax rate for 1988 -- a result of the 1988 district-wide revaluation -- against the pre-conversion assessment. If the board had continued this method, the Hastings Village plaintiffs would be entitled to no tax surcharge whatsoever for 1988, notwithstanding that the tax burden for the entire cooperative in 1988
increased by approximately 55% from $332,846.11 to $516,275.38.
Plaintiffs apparently decided not to await the annual ritual and informal redetermination of allowable tax surcharges and advised their tenants pursuant to the Rutherford rent-control ordinance of the impending tax surcharge based simply upon the arithmetical application of the section 83A-7(A) formula. Although the record is far from clear, it appears that the board took the unprecedented step of reacting to tenant complaints by conducting an "investigatory" hearing on July 28, 1988 for the purpose of setting the 1988 tax surcharge upon plaintiffs.
The board produced two witnesses, both expert appraisers, and sought to elicit information from which the board could distill a discrete component out of the 1988 taxes which was attributable to the conversion, and which could be deemed "conversion costs."*fn4 A review of the record reveals the near impossibility of such a search and the candid admissions by the experts reveal that such an analysis was not only infeasible, but virtually nonsensical. Appraisal science (some might say artistry, others call it alchemy) could not provide the board with the objective data which it was seeking. Nevertheless, a clear "feeling" on the part of the board emerged from the hearing, and which was expressed at trial, that although the board could not quantify the "conversion costs" in the 1988 taxes, it nevertheless sensed that some conversion cost was embedded in the 1988 taxes. Without the objective data it sought, the board applied an equitable policy to cap the tax surcharge at 17% which reflected the overall percentage increase in taxes in Rutherford between 1987 and 1988.
In 1982 the total local property tax burden of the owner of Hastings Village was $122,289.81.*fn5 As a result of the conversion, the 1983 taxes, after a successful tax appeal, were $245,338.65. This translated into an increase of $9.38 a room a month. Litt, supra at 459, 483 A.2d 239. Plaintiffs suggest that the disallowed "conversion costs" are $123,049.65, which is the arithmetical difference between the 1982 taxes and the 1983 taxes. This can not be the case, however, because the actual disallowed "conversion costs" were computed by applying the 1983 tax rate to the 1982 assessment. Ibid. The tax generated by that product must be deducted from the actual 1983 taxes to reveal the actual disallowance:
Step 1: Determine 1982 Taxes: $122,289.81
Step 2: Determine 1982 Tax Rate:*fn6 $3.67
Step 3: Determine 1982 Tax Assessment:*fn7 $3,332,125.30
Step 4: Determine 1983 Tax Rate:*fn8 $3.93
Step 5: Determine 1983 Tax pursuant to formula
validated by Judge Evers in Litt, supra:*fn9 $130,952.52
Step 6: Determine actual 1983 Taxes: $245,338.65
Step 7: Determine Disallowed Tax
("cost of conversion"):*fn10 $114,386.13
As a further example of the jumble of figures here, plaintiffs suggest that the board allowed $0.35 per room per month for
the 1983 year as a result of Litt, supra. That amount was not the subject of a stipulation among the 0 parties, and it makes no sense in light of the facts which were stipulated. If the board allowed an increase of $0.35 per room per month in 1983, it would necessarily have found an increase between the 1982 taxes and the 1983 adjusted taxes to be $4,586.40*fn11, instead of the amount of $8,663.52*fn12 which is arithmetically compelled by the stipulation. ...