The opinion of the court was delivered by: Crabtree
Plaintiff first appealed both assessments to the Hudson County Board of Taxation, which affirmed the assessments without prejudice. The county board judgments were then appealed to the Tax Court.
The subject of the controversy is an industrial building containing 244,583 square feet and sited on 6.815 acres of land. The building, which was approximately 50 years old on the valuation date, is of concrete block and steel frame construction and contains some 50,000 square feet of improved office area.
Prior to the addition completed in or about March 1995, the building contained three overhead loading doors. The office area was in disrepair and in need of new walls, ceilings, and floor covering. The property had been vacant for about three years prior to its acquisition by plaintiff on May 5, 1994. Between its acquisition of the property and the end of March 1995, plaintiff renovated the office area with new sheetrock walls, drop ceilings, and floor covering. Plaintiff also installed three additional overhead loading doors and upgraded the electrical system, the wet sprinkler system, and the HVAC system. Plaintiff also installed a demising wall separating the space leased to two tenants. These renovations and upgrades, together with the new overhead doors and the demising wall, appear to be the basis for the added assessment. No proofs were submitted by either party concerning the costs of these items, either separately or in the aggregate.
Plaintiff purchased the subject property from Harrison Riverside Ltd., a partnership owned by Hartz Mountain, on May 5, 1994, for $2,150,000. As indicated earlier, the property was vacant at the time of such purchase and had been vacant for about three years prior thereto. In July 1994, plaintiff leased 53,600 square feet of space in the building to Print Perfect Express, Inc. for five years at $3.21 per square foot, plus 22% of the taxes in excess of the taxes for base year 1994. In January 1995, plaintiff leased 53,600 square feet of space to Inner Secrets, Inc. for five years at $3.25 per square foot, plus 22% of the taxes in excess of the taxes for base year 1994. The demising wall referred to above was installed by plaintiff to separate the space demised to the two tenants.
Plaintiff's expert estimated the true value of the subject property on October 1, 1994, prior to the renovations and upgrades described above, to be $2,300,000. In arriving at this estimate he relied upon the sales comparison and income approaches to value, placing principal reliance upon the sale of the subject to plaintiff on May 5, 1994. For added assessment purposes the expert estimated the true value of the subject property to be $2,740,000. In arriving at this estimate he relied solely upon the income approach to value.
Although the expert relied primarily upon the sale for his estimate of true value in connection with the regular assessment, he also sought support from five allegedly comparable sales of other industrial properties in Harrison, Hillside, Hoboken, Kearny, and North Brunswick. The sales occurred between September 28, 1992 and August 28, 1996, and the sale prices ranged from $2.68 per square foot to $16.86 per square foot. The sizes of the improvements varied from 97,825 square feet to 767,000 square feet. After adjustments for size, condition, land-to-building ratio, ceiling clearance, percentage devoted to office space, and, in one instance, post-settlement cleanup costs, the expert arrived at adjusted sale prices ranging from $7.25 per square foot to $12.65 per square foot. On the basis of these comparables, and including the sale of the subject, the expert concluded that the true value of the subject, using the sales comparison approach, was $9.00 per square foot, or $2,200,000 (rounded).
For his income approach, the expert relied upon seven allegedly comparable leases to arrive at an economic rent estimate. Two of these leases were the leases in the subject property described above. Another lease was not a lease at all, but merely an offering to lease the subject property circulated by plaintiff's predecessor-in-title. The allegedly comparable leases in the properties, other than the subject, were executed in 1991 and 1993. They involved net square foot rentals of $1.83, $2.06, $2.52 and $2.60. The areas leased were 48,990 square feet, 28,173 square feet, 376,000 square feet and 48,600 square feet. After minor adjustments for size, ceiling clearance, percentage devoted to office, and on-site parking or loading, the square foot rentals were $1.83, $1.85, $2.15 and $2.21. The contract rentals in the subject were adjusted for condition, size, and office percentage. The expert also converted the leases from gross to net by estimating the base year (1994) taxes, the limit of the lessor's responsibility, at 20% of the contract rent. After these adjustments and conversion from gross to net, the expert posited rents in the subject at $2.09 and $2.11. On the basis of the foregoing, the expert estimated economic rent for the subject prior to the renovations, upgrades, and additions (the demising wall and the three new overhead doors) at $1.80 per square foot.
The expert went on to project a vacancy and loss allowance of 10% and operating expenses of 31.4% of effective gross income (5% management, 3.7% leasing commissions, 10% structural reserves and 12.6% tenant alterations) to arrive at net operating income of $271,933, which he capitalized at 11.24%, using the band of investment mortgage-equity method. *fn1 This resulted in a value estimate of $2,420,000, rounded.
The expert reconciled the sales comparison and income approaches by positing a final value estimate of $2,300,000.
In estimating the true value of the subject property for added assessment purposes, the expert relied exclusively upon the income approach. He relied upon the same comparable leases, including the two leases in the subject, but simply added 10% to his income estimate, and relied upon the same vacancy and loss allowance and expense ratios to posit net operating income of $307,703, which he capitalized at 11.24%, under the band of investment mortgage-equity method, to arrive at true value for added assessment purposes of $2,740,000, rounded.
Finally, the expert applied the municipality's general average ratio, duly calculated and promulgated by the Director, Division of Taxation, at 87.69%, to the true value estimated for added assessment purposes, and subtracted therefrom the taxable value determined by applying the same general average ratio to his true value estimate prior to the added assessment in order to fix the amount of the added assessment. This was $385,800 ($2,402,710 less $2,016,870, rounded), prorated for four months at $128,600 (rounded).
Defendant's expert estimated the true value of the subject property to be $4,400,000 on the assessing date. *fn2 In arriving at this Conclusion, he utilized both the sales comparison and income approaches to value, placing principal reliance upon the latter. His sales comparison approach reflects a value estimate of $5,425,600, which is considerably higher than the value estimate developed under the income approach. As defendant's expert relied primarily upon the income approach, the value developed under the sales comparison approach will be disregarded. The sales comparison approach figures in this case principally because of plaintiff's expert's reliance upon the sale of the subject as probative of its true value.
Defendant's expert posited economic rent of $2.50 per square foot. To support this estimate he relied upon four net leases of allegedly comparable properties, all located in Harrison. Those leases, executed in 1992, 1993 and 1995, provided for rentals ranging from $3.35 to $4.45 per square foot. After some minor adjustments for building age, size, and condition, the square foot rentals ranged from $2.88 to $3.56. The expert also relied upon the leases in the subject property, which, as stated earlier, called for square foot rentals of $3.21 and $3.25. The expert converted those rents from gross to net by subtracting the 1994 taxes, which he estimated at $0.54 per square foot, thereby arriving at net rentals of $2.46 per square foot and $2.71 per square foot. He testified that he relied primarily upon the rents payable under the subject leases, adjusted to account for the tax stop, in arriving at his estimate of economic rent.
The expert posited a vacancy and loss allowance of 5% and operating expenses of 16.4% (3% management, 8.4% structural reserves (expressed as $0.20 per square foot), 3% leasing commissions and 2% miscellaneous) to arrive at net operating income of $468,253, which he capitalized at 10.64% to obtain his final value estimate of $4,400,000 (rounded). His capitalization rate was developed under the band of investment mortgage-equity method, using the same positions and mortgage component as plaintiff's expert. ...