On appeal from the Tax Court.
Before Judges Keefe, P.g. Levy and Wecker.
The opinion of the court was delivered by: P.g. Levy, J.A.D.
After a trial, the Tax Court reduced the property tax assessment on a tract of land in Cresskill and Alpine Boroughs. *fn1 The property, known as Tamcrest Country Club, consists of a golf course, tennis courts and swimming pool (with their usual appurtenances) and a clubhouse/banquet hall. In a thorough and well-reasoned opinion, Judge Kahn found that the highest and best use of the tract would be as a residential subdivision, which would cover the entire tract, thus eliminating the clubhouse. The final judgment significantly reduced the municipal assessments for the three years under review (1993, 1994, and 1995), especially as to improvements, which were found to have only a nominal value. The amount of the reduction in assessment in the three tax years in question ranged from $5.9 million dollars in 1993 to $6.5 million dollars in 1995. Tamburelli Properties Assn. v. Cresskill Borough, 15 N.J. Tax 629 (Tax 1996). In a separate action, the court entered judgment reducing the 1996 assessment pursuant to the provisions of the Freeze Act. N.J.S.A. 54:51A-8.
Contending that the underlying assessments were improperly calculated, and that the Freeze Act judgment was entered prematurely, the municipality has filed two appeals. We affirm the first, essentially for the reasons expressed by Judge Kahn, and dismiss the second as moot.
At trial, the taxpayer valued the property as a going business, using the income capitalization method, alternatively calculating value based on use of the entire tract as a residential subdivision with value computed pursuant to a discounted cash flow (DCF) analysis over five years. The municipality claimed the highest and best use of the property would be to develop thirty acres into twenty-four one acre residential lots and maintain the clubhouse as a catering business on the remaining 5.58 acres. It also calculated the value of the residential subdivision by a DCF methodology, over four years. The clubhouse was valued by the cost approach and the land under it by a market sales analysis. Regardless of the methodology, the parties stipulated that the finished residential lots in the hypothetical subdivision would each have a market value of $455,000.
Judge Kahn resolved the conflict over which subdivision plan would produce the "highest and best" use of the property by deciding that the municipality failed to prove a "reasonable probability that the use would be permitted [if the property were subdivided for residential uses]. Id. at 638. He also found that "the municipality's appraisal expert's valuation analysis of the building and land thereunder is insufficient ... to determine value." Id. at 641. Each appraisal expert used the discounted cash flow analysis and each concluded the value would be greater under that method than the other methods each had considered. Judge Kahn decided that the highest and best use of the property was for "one-family home development," specifically, a subdivision into twenty-eight lots of approximately one acre each, which would be developed over a five year period. Id. at 642, 648. He pointed out that this hypothetical use met the criteria of Ford Motor Co. v. Edison Tp., 10 N.J. Tax 153, 161 (Tax 1988), aff'd o.b. per curiam 12 N.J. Tax 244 (App. Div. 1990), aff'd 127 N.J. 290 (1992), in that it was "1) legally permitted, 2) physically possible, 3) economically feasible, and 4) the most profitable."
The municipality first contends that the exclusion of the clubhouse from the use considered highest and best was erroneous. Its argument centers on the zoning classification of the clubhouse which existed as a nonconforming use on the country club property. The Judge was not persuaded by testimony from various municipal officials to the effect that the municipality would allow the banquet hall use to continue after the country club ceased to exist. He decided that the reduction in lot size from 35.58 acres to 5.58 acres constituted an expansion of a nonconforming use by increasing the intensity of use on the remaining smaller lot, a situation analogous to Razberry's Inc. v. Kingwood Tp. Pl. Bd., 250 N.J. Super. 324 (App. Div. 1991). Thus, a use variance would be required to permit the clubhouse to continue as a permitted use, but Judge Kahn found it too speculative to permit valuation based on the possibility of a variance being granted. Tamburelli, supra, 15 N.J. Tax at 637. He further considered that sales of lots in the development of adjacent property, formerly a golf course, were conditioned on demolition of the catering clubhouse located thereon. That clearly showed that buyers of high-end residences in the area do not want to live in the immediate vicinity of a busy banquet hall. As he stated, the municipality failed to produce any evidence of what effect the continued clubhouse would have on the value of the lots, "especially those closest to the buffer area." Id. at 638. Each of these findings have substantial support in the record and are therefore affirmed.
On appeal, the municipality advises that shortly after the judgment of the Tax Court, the local zoning ordinance was amended to permit a catering facility in this zoning district. Cresskill seeks to have us apply the "time of decision rule" as stated in Kruvant v. Mayor & Council of Cedar Grove, 82 N.J. 435 (1980). We find that contention inapposite and without merit. The focus of an appeal of property taxes is on the market value of the property as of the first of October in the applicable pretax year. N.J.S.A. 54:4-23. Changes to the legal status of the property after that date are not relevant, unless they were foreseeable changes. The municipality only presented evidence of a possible zoning variance or of municipal acquiescence in the continued use of the clubhouse as a nonconforming use. None of its witnesses testified about the probability of a rezoning, and there simply is no credible basis for deciding that a rezoning was foreseeable.
Judge Kahn utilized the DCF analysis to calculate the true market value of a twenty-eight lot subdivision of the property. He found DCF useful here because the parties had stipulated the value of a finished lot and estimated that it would take either four or five years to sell every lot. Thus it was appropriate to adjust the total mathematical value (28 x $455,000 = $12,740,000) by deducting entrepreneurial profit, sales commissions, and management and overhead expenses in order to produce annual cash flows which were then reduced to present value, and then to reflect the time it would take to complete the subdivision by applying an "absorption discount." At trial, the taxpayer and the municipality followed the same procedure, differing only by their experts' opinions as to the appropriate percentages and costs. At the court's request, the parties calculated several different models, yielding different values dependent on the variables used. Direct and indirect costs of development were stipulated for the Cresskill property. As to the parameters of value that were not stipulated, Judge Kahn explained why he found the development would take five years, why the discount rate should be eleven percent, and why the entrepreneurial profit should be twelve percent. His findings have substantial support in the record.
On appeal, the municipality argues for the first time that utilization of an absorption discount to account for the development and sale of all the lots in a five year period violates the constitutional requirement that assessment of real estate should be made uniformly. Our Constitution provides:
Properties shall be assessed for taxation under general laws and by uniform rules. All real property assessed and taxed locally or by the State for allotment and payment to taxing districts shall ...