The opinion of the court was delivered by: Crabtree
The cases have been consolidated for trial, briefs and decision.
At issue are the true value of the subject property and whether either party is entitled to relief from a discriminatory assessment pursuant to N.J.S.A. 54:51A-6, commonly referred to as chapter 123.
The general average ratios, and the upper and lower limits of the common level range, as determined by the Director, Division of Taxation, pursuant to N.J.S.A. 54:1-35b, for defendant taxing district for the years under review were:
Average Ratio Upper Limit Lower Limit
1993 47.16% 54.23% 40.09%
1994 49.28% 56.67% 41.89%
1995 51.19% 58.87% 43.51%
The subject parcels are all contiguous and form a single economic unit.
The subject of the controversy is an aggregation of buildings, most of which are multistory, brick mill-style structures, erected in the late 1800's and early 1900's. Plaintiff's expert counts 71 buildings; defendant's expert lists 38 buildings. The actual number depends upon whether one counts some of the smaller structures as single buildings. In any event, the precise number is not material, as both experts agree that the total leasable space in the aggregation of improvements amounts to 1,133,775 square feet.
The property is sited on 13.45 acres. Block 12, Lot 1, containing 12.5 acres, has virtually all the leasable improvements. Block 13, Lot 2, containing 1.6 acres, is improved only with macadam paving and is used as a parking lot. Block 17, Lot 1, containing 1.35 acres, is also used as a parking lot. It is improved not only with macadam paving, but also with fencing, bulkheads along the Passaic River and two shed buildings.
The majority of the leasable space is utilized for light manufacturing, with the remainder devoted to office, outlet retail, storage and warehousing. One building houses a gym and health club.
The total leasable area of 1,133,775 square feet includes 28,000 square feet of basement area, 318,575 square feet of first floor space, 237,200 square feet of second floor space, 188,000 square feet of third floor space, 188,000 square feet of fourth floor space and 174,000 square feet of fifth floor space.
The total leased area ranged from a low of 733,775 square feet in 1993 to a high of 959,175 square feet in 1994. All leases in the subject property are gross, and most of the longer term leases call for the payment by the tenant of taxes in excess of the base year taxes ("the tax stop"). Most of the leases also require expense pass-throughs for water, electricity, gas, oil and other expenses.
In addition to the expense pass-throughs, the landlord sells water and electricity to the tenants. Also, the landlord derives income from parking and land rent, items which amount to an additional $67,500 of annual income from the property.
The additional income realized by the property owner from parking, miscellaneous tenant pass-throughs, electricity charges, water charges, operating expense pass-throughs and tax pass-throughs amounted to $1,649,359 for 1991 ($1.78 x 927,175 square feet), $1,545,802 for 1992 ($1.89 x 818,775 square feet), $1,199,413 for 1993 ($1.63 x 733,775 square feet), and $1,023,725 for 1994 ($1.07 x 959,175 square feet).
There were 56 leases in the subject property, exclusive of the land and parking leases. All those 56 leases were executed between 1991 and 1995, with 10 leases executed in 1995. 17 of the 56 leases were so-called step leases, i.e., they called for increases in the rent, other than cost-of-living increases, at one or more times during the life of the lease. Of the 35 leases executed between 1992 and 1994, 14 were of the step variety.
The expenses in the subject property were relatively stable. In the three pretax years 1992, 1993 and 1994, the expenses per square foot of leased area were, respectively, $1.33 (818,775 square feet of leased area), $1.61 (733,775 square feet of leased area) and $1.21 (959,175 square feet of leased area). The actual expenses for those years, exclusive of property taxes, depreciation and debt service, were $1,089,987 for 1992, $1,180,641 for 1993 and $1,160,137 for 1994.
The actual vacancy in the subject property, in terms of leasable area, was 27.78% for 1992, 35.28% for 1993 and 15.40% for 1994.
Plaintiff's expert estimated the true value of the subject property to be $8,000,000 on October 1, 1992, for tax year 1993, $7,900,000 on October 1, 1993, for tax year 1994, and $7,900,000 on October 1, 1994, for tax year 1995. In developing these estimates, he relied upon the income and sales comparison approaches to value, placing principal reliance upon the former.
The expert analyzed the leases in force on each of the five floors throughout the subject property. From this analysis he arrived at an estimate of economic rent for each floor. He concluded that the 28,000 square feet of basement space could be rented for $2.00 per square foot, although there were no leases of basement space. On the basis of his analysis of the leases in place on the five floors and his estimate of the rental applicable to the basement space, he arrived at estimates of economic rent *fn1 for all years under review as follows:
LEVEL AREA (SF) UNIT RENTAL RENTAL
Basement 28,000 $2.05 $57,400
First Floor 318,575 $3.90 $1,242,443
Second Floor 237,200 $3.05 $723,460
Third Floor 188,000 $3.05 $573,400
Fourth Floor 188,000 $3.05 $573,400
Fifth Floor 174,000 $2.80 $487,200
Total 1,133,775 $3.23 $3,657,303
To the foregoing, he added an amount for land leases of $67,400, for a total of $3,724,703, in potential gross income. In arriving at his estimates of economic rent for each floor, he used only the first year's rent, ignoring the increases in the step leases.
He calculated a vacancy and loss allowance of 20.99%. In arriving at this Conclusion, he analyzed the actual vacancies, which averaged 24.06% on an unweighted basis, over a four-year period (1991 through 1994), and concluded that what he termed a weighted average of 20.99%, derived from the actual vacancy level of each floor (including the basement and land leases), was the appropriate vacancy and loss allowance. Nowhere in his analysis does he define the vacancy and loss allowance in terms of the long-term quality and durability of the income stream.
He calculated the actual income derived from the charges for sales of water and electricity and parking rentals and averaged such income over the years 1991 through 1994, inclusive. The total of such averaged income items for those four years was $323,141, which he stabilized for all years under review at $350,000. He included no income from expense pass-throughs or tax stops.
He analyzed the operating expenses for the years 1991 through 1994, inclusive, and concluded that the four-year average was $1.60 per square foot. Me then added a management fee of 5% of effective gross income, a leasing commission of 5% of effective gross income and reserves of 1% of effective gross income. These additions to the operating expenses, as reported on plaintiff's operating statements, brought the total expenses to $1.91 per square foot, or $2,205,554.
Finally, the expert posited a capitalization rate of 11.11%, exclusive of the effective tax rate. He developed his capitalization rate by use of the band of investment/mortgage equity technique, assuming, in this regard, a 70% mortgage position, a 10% interest rate, an amortization period of 20 years (resulting in a mortgage constant of 11.58%), a 30% equity position and a 10% equity dividend rate. To the capitalization rate thus derived, he added the effective tax rate for each year under review, namely, $2.50 for 1993 (actual rate of $5.31 x the average ratio of 47.16%), $2.67 for 1994 (actual rate of $5.41 x the average ratio of 49.28%) and $2.72 for 1995 (actual rate of $5.32 x the average ratio of 51.19%).
Thus, his Conclusions can be schematically ...