The opinion of the court was delivered by: Kahn
The year 1993 (assessment date October 1, 1992) is a revaluation year. The chapter 123 ratio for 1994 (assessment date October 1, 1993) is 90.25%, and for 1995 (assessment date October 1, 1994) the ratio is 89.46%. The property in question is the Tamcrest Country Club, and involves 35.58 acres of land located in the Borough of Cresskill, known as Block 91, Lot 3, upon which exists a nine-hole golf course, a two-story clubhouse (43,326 s.f.) and several accessory buildings (pro shop, utility building, garage) along with a swimming pool and three tennis courts. There is also significant paving for interior utility roads and parking. Tamcrest also includes approximately 18.58 acres located in Alpine (not under appeal in this case) which includes a portion of the golf course and parking area.
The clubhouse has two main uses. The upper level is utilized primarily as a catering facility provided for weddings, Bar/Bat Mitzvahs and various other organizational banquets. While some Tamcrest Country Club members use the catering facility, most bookings are to nonmember customers. The upstairs portion also contains some office space utilized for both the country club and the catering business. In the downstairs portion there is a restaurant utilized primarily for club members; however, that room is also occasionally utilized for catering. Downstairs there are also men's and women's locker rooms and a bar generally utilized by club members.
The improvements were first constructed in and around 1969 with some renovations being made in 1981 and 1985.
The zoning ordinance in effect at the time Tamcrest was constructed essentially provided for a one-family residential zone permitting one-family detached dwellings on lots with a minimum area of 40,000 sq. ft. (R-20). The zoning ordinance, as amended, included private membership golf clubs with facilities such as golf courses, tennis courts, swimming pool, auxiliary buildings, restaurants, bars, etc. This ordinance was subsequently amended prior to the relevant assessment dates, specifically eliminating the provision permitting construction of a golf course. One-family residences became the only permitted use.
The subject property is one of three golf clubs that were developed on property owned by the Tamburelli estate. Up to the mid-1980s all three country clubs were in existence: the subject (Tamcrest), Tammy Brook Country Club, and Montammy Country Club. Most or all of the land of these properties was contained in the Borough of Cresskill. The Tammy Brook Country Club property is situate to the immediate west of the subject. Montammy Country Club is situate immediately north and east, thereby being the closest of the three clubs to Route 9W. The entrance to Tammy Brook Country Club was through local streets in Cresskill from the westerly edge of Tammy Brook. The entrance to Montammy and Tamcrest is only from Route 9W by an access road which first passes in front of Montammy and ultimately reaches Tamcrest, approximately one quarter of a mile from Route 9W.
In and around 1987, the Tammy Brook property, which had formerly been operated as an 18-hole golf course and country club, was sold to a developer. The club had consisted of the golf course, along with a swimming pool, tennis courts and club house catering building. The property was subdivided into approximately 100 one-family lots which were sold between 1988 and 1995. The site plan approval apparently did not require the demolition of the catering building. Within a year or two thereafter, however, the catering building was demolished.
Currently Tamcrest functions as a golf, swimming and tennis country club with annual memberships renewable by agreement. Montammy Country Club also is utilized as an 18-hole golf course with similar facilities, except that the club is member owned.
The facts relating to the history of the Tammy Brook Country Club will be hereinafter discussed in this opinion and may be referred to as the "Tammy Brook experience." Both parties relied upon certain facts and circumstances concerning Tammy Brook.
The taxpayer contends that the property should be first valued as a going business and offers the current lease between the property owners and the current operators of the business as evidence of value through an income capitalization approach. In the alternative, the taxpayer contends that the highest and best use of the property would be a subdivision of the entire property into one-family lots. Taxpayer utilizes a discounted cash flow analysis to obtain the present value of the property, which value would be realized over a five year period. This subdivision or anticipated use method anticipates that an investor would need to provide funds to obtain permits, engineering work, and site work to make the property ready for marketing, followed by a period of time to sell the lots. *fn1 These expenses are often referred to as direct and indirect costs.
The municipality contends that the highest and best use of the subject property is to develop approximately 30.00 acres into 24 one-family home lots for resale and to utilize 5.58 acres to retain the clubhouse building and catering business. The municipality further contends that the cost approach should be utilized to value the building and a market sales analysis should be used to analyze the value of the land upon which the building is situate. The municipality also contends that the 24 one-family home lots (30.00 acres) should be valued by a discounted cash flow analysis. Taxpayer's initial approach results in a value estimate of $3,000,000, while the municipality urges $11,768,000.
The parties, at the outset of the trial, agreed and stipulated that the finished residential lots would have a value of $455,000 per lot which eases the court's determination.
WHETHER OR NOT THE CATERING BUILDING MAY CONTINUE AS A PERMITTED USE.
The taxpayer contends most significantly that by the elimination of the golf course (which both parties recommend), the catering building would not be a legally permitted use and, therefore, the municipality's analysis must be rejected. If taxpayer is correct, then the municipality also urges that the highest and best use of the subject property is for development of one-family residential lots to be valued by the subdivision/discounted cash flow method.
Taxpayer looks to the initial ordinance which permitted the construction and erection of the golf course and catering building. Taxpayer argues that currently he existing golf course and catering building together would be a legal nonconforming use, but that removal of the golf course would change the character of the use so as to convert the building into a nonlegal use. Reference is made to the language of the relevant Ordinance 474 which permits the clubhouse building as an accessory use to the golf course:
1) Annual private membership golf clubs catering primarily to members and their guests, subject to the following provisions:
a) Facilities and Uses : Such clubs may provide such facilities as golf courses, tennis courts and swimming pools and auxiliary buildings, restaurants, bars and similar facilities accessory thereto.
2) The minimum lot size shall be 100 acres and no building or structure shall be located nearer than 200 feet to any public street or property line.
This Ordinance No. 474 clearly does not permit the building without the golf course. A use variance would have been required to obtain the building permit for the building in the absence of the golf course.
The municipality relies upon the "Tammy Brook experience." In 1987-1988 the purchaser of the Tammy Brook property received site plan approval for approximately 100 one-family home lots and apparently the right to continue the catering building. Based upon this, the municipality asserted that the municipality would now likewise permit the subject catering building to continue in the absence of the golf course. The municipality also relies upon off-the-record statements allegedly made by certain Cresskill officials that they would favor the retention of the catering building. This court, however, feels that the greater weight of reliable evidence indicates that it is not likely that the catering building and use therein would be permitted to continue.
In the first place, the removal of the golf course creates a building that would not have been permitted pursuant to Ordinance No. 474 at the time of its erection without a use variance. The stated purpose of that building within the ordinance was clearly to be an accessory to a golf club as a place to eat, drink and socialize, which is obviously necessary to such a club. Certainly the catering building is not a necessary appurtenance to a subdivision of one-family homes. While technically the elimination of the golf course reduces the gross size of the nonconforming acreage, the actual nonconformity is greater because the catering building is greater in its nonconformity to the proposed surrounding area of new one-family homes.
The courts have strictly construed the continuation of a nonconforming use. Essentially, little change in such use is permitted. There is no question that expansion of a nonconforming use is prohibited. Ranney v. Instituto Pontificio Delle Maestre Filippini, 20 N.J. 189, 119 A.2d 142 (1956). See also, Town of Belleville v. Parrillo's, Inc. 83 N.J. 309 (416 A.2d 388 (1980).
Although a property owner may make a negligible or unsubstantial change in a nonconforming use without a use variance,
(w)here there is doubt as to whether enlargement or change is substantial rather than insubstantial, the courts have consistently declared that it is to be resolved against the enlargement or change.
In Razberry's, Inc. v. Kingwood Tp. Planning Bd., 250 N.J. Super. 324 (App. Div. 1991), the Appellate Division found that a decrease in the size of property containing a nonconforming use (from 8 acres to only 3 acres) might still require a use variance for the continuation of that use. Id. at 328. The court held that the reduction in size of property lessened the buffers between the conforming and nonconforming uses thereby intensifying the nonconforming use.
If the property owner seeks to retain the use of the catering building, he is faced with a situation clearly analogous to that described in Razberry. The elimination of the golf course creates two problems. In the first place, the right to erect the clubhouse building exists only by reason of its use in conjunction with a golf course as specifically set forth under the terms of the then existing zoning ordinance. Removal of the golf course creates a building not otherwise permitted under said ordinance.
Secondly, the removal of the golf course creates a smaller lot for the building, lessening the buffers between the building and the surrounding one-family homes and creating a situation clearly identical to the facts presented in Razberry.
This court concludes that a use variance would be required in order to continue the existence of the building and its current use.
The municipality contends that in the event a variance would be required, same would be granted and, therefore, the building and catering business would be permitted to continue. In support of this contention, the municipality proffers:
(a) conversations between its appraiser and several municipal officials indicating an interest in retaining the catering business; and
(b) the contention that the Tammy Brook experience in and around 1987 was similar and that the municipality in that instance apparently permitted the continuation of a catering building as part of its subdivision approval for 100 homes.
This court rejects the municipality's contention and finds that consideration of municipal approvals in this case is too speculative and uncertain to permit valuation of the subject property by including the catering building as it is currently utilized.
First, the conversations between the municipality's appraisal expert and several municipal officials were clearly nonbinding and off-the-record. The formal variance procedure requires notice to neighboring land owners, at least one public hearing, and consideration on the record by either the zoning or planning board at a public meeting. These off-the-record conversations are unreliable as evidence that a variance would be granted.
Second, approvals granted to Tammy Brook developers in 1987 and 1988 are not transferable to Tamcrest and not precedent upon which Tamcrest may rely. That municipal action took place almost ten years ago. There is no evidence that the members of the relevant municipal agencies between October 1, 1992 and October 1, 1994 (subject assessment dates) were the same as were those deliberating on the Tammy Brook site plan. No right would be conferred upon the taxpayer if the variance application was applied for merely by reason of the fact that in 1987 or thereabout a similar project was approved for another developer. The record in this case does not indicate whether or not a variance was applied for and approved in order to permit the continuation of the catering building with respect to the Tammy Brook development.
The record does demonstrate that not long after site plan approval for the Tammy Brook building, the developer began marketing and selling the homesites. In evidence is one contract which required the demolition of the catering building as a condition of sale. Taxpayer's expert witness testified that his investigation revealed eighteen other contracts with a similar condition. While the other eighteen contracts were not produced at this trial, this court finds the testimony credible and reliable. No testimony or evidence was produced by the municipality to demonstrate what effect the continuation of the catering building if approved would have on the valuation of the lots, especially those closest to the buffer area.
The Supreme Court of New Jersey in State by Com'r of Transp. v. Caoili, 135 N.J. 252 (1994) (a condemnation case), considered the establishment of the highest and best use of property in light of zoning restrictions. The court in referring to its opinion in State v. Gorga, 26 N.J. 113 (1958) re-established a two-step approach dealing with zoning restrictions:
The Court therefore imposed, in effect, a two-step standard governing the consideration of evidence of zoning changes affecting the future use of property. It established one standard for the admissibility and another for the substantive consideration of such evidence. It stated: "if as of the date of taking there is a reasonable probability of a change in the zoning ordinance in the near future, the influence of that circumstance upon the market value as of that date may be shown," but that before allowing a jury to consider the issue, the trial court should first decide whether the record contains sufficient evidence of a probability of a zoning change to warrant consideration by the jury.
Id. at 116-17, 138 A.2d 833.
This court finds that admissibility of the evidence promoting a zoning change is not the issue. This court permitted the statements made by the municipality's appraiser as to conversations from third parties and further admitted evidence concerning the Tammy Brook experience. Clearly, the municipality has failed to demonstrate a reasonable probability that the use would be permitted. Thus, pursuant to Ford Motor Co. v. Edison Tp., 19 N.J. Tax 153 (Tax 1988) aff'd o.b. per curiam 12 N.J. Tax (App. Div. 1990), aff'd 127 N.J. 290 (1992), the first element of the highest and best use test (whether a proposed use is legally permissible) was not proven. Moreover, recognizing that there would be at least a question concerning granting of such permission, the municipality likewise failed to produce any evidence of the effect a zoning change contingency would have upon the value of all or any of the proposed one-family lots.
THE MUNICIPALITY'S VALUATION METHODOLOGY FOR THE CATERING BUILDING AND LAND THEREUNDER.
Although this court finds that the catering building would not legally be permitted to remain, it is necessary to review the municipality's valuation methodology for the building and land thereunder. For the 5.58 acres under the building, the municipality utilized a comparable sales approach involving three sales of purportedly comparable land upon which structures were built which are allegedly comparable to the subject. Sale No. 1 was located on Market Street in Elmwood Park consisting of 2.36 acres; Sale No. 2 was located on Kinderkamack Road in River Edge consisting of 1.51 acres; and Sale No. 3 was located on Old Hook Road in Westwood consisting of 1.02 acres. All three of these properties have frontage on main business/commercial thorough-fares in their respective communities. The improvements constructed on the three comparable properties consisted of a retail building, a commercial building, and a medical building, all fronting the aforementioned business arteries, and therefore all visible to traffic. In addition, the sizes of the comparables are so significantly less than the subject (5.58 acres), that adjustment is unreliable. The subject parcel is located approximately 1/4 mile west of Route 9W, not visible to Route 9W traffic. No other access exists. There was no evidence that Route 9W traffic passes by any similar commercial building other than major office buildings in which people work on a daily basis. There is absolutely no similarity or comparability between the subject location, use and size as compared with the purported comparable sales.
The municipality's cost approach also fails. This court does not take issue with the witness's analysis of the replacement cost factors through the Marshall Valuation Service Manual, or the estimated 17% physical depreciation. The municipality's expert witness's estimate of 10% functional obsolescence is unrealistic as indicated by his own testimony. The witness acknowledged on cross-examination that a significant means of testing his analysis would be the use of income approach to gauge the extent of the difference in valuation between the two approaches. He acknowledged also that the difference between the results (acknowledging the cost approach to be higher) should crystallize the extent of functional obsolescence.
The witness admitted that he neither attempted to obtain information as to comparable leases of similar properties, nor did he analyze the lease between the current owner of the property and the operator of same. Taxpayer's appraisal expert had already testified that the lease was entered into for a 25-year period beginning January 1, 1980, and terminating in 2004. A history of that lease shows various increases which produce current leasehold income to the owner in the amount of approximately $280,000 per year. The municipality's expert concluded by the market data approach for the land and the cost approach for the building, that the value of the building and the accompanying land total $5,900,000. Utilizing a 10% rate (equivalent to the rate utilized by the municipality's witness as a discount rate in his discounted cash flow analysis), the income needed to produce a value of $5,900,000 would necessarily be at least $590,000. The witness further acknowledged that there is reliable evidence that the owner at most earns a total income of $280,000, which if capitalized at the same 10%, would produce a value of $2,800,000 for the catering building and land. While the municipality's expert witness did not stipulate that the $280,000 of rental income is necessarily market rent, he acknowledged that if, in fact, it was market rent (it being the only evidence of market rent), the difference between the income approach value and cost approach value exhibits a significant difference, attributed to functional obsolescence, in an amount far greater than his 10% estimate, in fact closer to 45%.
The municipality's expert witness also did not even consider that the question of whether or not the continuation of the catering building by municipal action would have an effect on a negotiated purchase price for the property. Our courts require that such analysis be made. West Orange v. Goldman's Estate, 2 N.J. Tax 582 (Tax 1981); see also State v. Gorga, supra. There is no question that a prospective purchaser would seriously consider the extent of permitted uses in negotiating a purchase price for the subject property. The municipality's expert witness also failed to consider that one-family lots located proximate to the buffer of a nonconforming use may not sell for the same price as lots further removed from the building. Although the parties stipulated to a price per finished lot, it was incumbent upon the municipality's appraisal team to at least analyze the issue. The Tammy Brook experience upon which the municipality relies so heavily demonstrates, contrary to the municipality's analysis, that purchasers of one-family lots were concerned enough with the effect of the building upon the value of certain lots to require demolition as a condition of purchase.
This court finds that, aside from the legal question of whether the catering building would be permitted with respect to the zoning ordinance, the municipality's appraisal expert's valuation analysis of the building and land thereunder is insufficient for this court to determine value, even considering the authority conferred upon this court by Glen Wall Associates v. Wall Township, 99 N.J. 265, 280 (1985).
TAXPAYER'S INCOME CAPITALIZATION APPROACH
The subject property, as of the relevant assessment dates, has been under a long term lease between the property owner and the operator of the golf club and catering facility. As hereinabove set forth, the lease commenced in 1980 for a period of 25 years through 2004. There is no dispute that the lease contained increases as set forth in the lease and the history of the relationship between the parties to the lease demonstrates other modifications over a period of time.
The initial rent in 1980 was $115,000 per year and, in fact, by reason of said changes, the actual rent paid in 1993 was $275,236 and in 1994, $280,741.
The taxpayer's appraisal expert found no comparable leases to compare with the subject for analysis of market rent. His analysis was solely based upon a comparison of the rental history with changes in the chapter 123 ratios over the years in question. His analysis, forming part of the appraisal report, viewed each annual change in the chapter 123 ratio as it compares with the changes required by the lease. He concluded that based upon the changes in the chapter 123 ratio, N.J.S.A. 54:1-35a, every $100 of rent in 1980 would have been negotiated at $215.95 in 1993-1994 based upon market forces. In short, this analysis indicated that the rent actually paid in 1993 and 1994 would have been paid by willing participants if currently negotiated.
Using gross income of $280,000, less a 5vacancy allowance, and 5% of effective gross income for reserves and management, the taxpayer's witness indicates a net operating income of $252,700. Capitalized at 10%, his indicated value by this methodology is $2,527,000.
This court finds that taxpayer's income capitalization methodology contains insufficient reliability as an independent method of valuation, mainly because there is no other evidence derived from the marketplace (or from ...