The opinion of the court was delivered by: Kahn, J.t.c.
This matter is a local property tax appeal wherein the only year in issue is 1996. The property in question consists of land and improvements located along Route 17 in the Borough of Paramus, Bergen County, New Jersey known as Block 5103, Lot 1. The land totals thirteen acres on which is situate a 155,615 square foot building constructed in 1973.
 The total assessment for 1996 is as follows:
As of the relevant assessment date, October 1, 1995, the subject was owned and occupied by Levitz Furniture Corp. and utilized entirely as a furniture store. Taxpayer purchased the subject property from Paramustock, Inc. (R. H. Macy) in 1993. Macy's apparently operated the property in the same fashion and there were no significant changes to the property's function subsequent to said sale. Neither party suggests that sale being evidence of value in this case.
The land currently contains parking for 399 cars. The municipality's zoning ordinance requires 513 parking spaces for the property to be fully utilized for retail, approximately 2.77 acres are described as wetlands, and another .77 acres contains a utility easement. A variance is needed to increase parking.
The improvements consist of 64,855 square feet of warehouse space containing an average of 38 feet in ceiling height. The warehouse is unfinished and open, containing some lighting, and heated with overhead space heaters. The warehouse is furnished with a non-realty racking storage system. The other portion of the property consists of 90,760 square feet of which approximately 20,000 square feet is considered office space and the balance showroom space. This is divided equally between the first and second floors. The property consists of five tailgate doors on the south wall and six on the north wall. All customers must enter through the warehouse and proceed through double doors to the showroom/office because there is no direct entrance to the showroom. It is undisputed that customers view furniture in and around the warehouse as much as those in the showrooms. Taxpayer contends the improvements are of average quality and condition, whereas the municipality suggests good quality and condition.
Taxpayer's appraisal expert finds a value of $8,825,000 as of October 1, 1995 based primarily on the use of the income capitalization approach corroborated by the market sales approach. The municipality's appraisal witness opines a value of $17,445,000 based primarily on the income capitalization approach corroborated by the cost approach.
Both parties contend the highest and best use of the subject property is as being currently utilized; however, only taxpayer's expert witness qualified his opinion as to highest and best use. Taxpayer's expert witness recommended converting 20,000 of the 23,000 square feet of office space to showroom at a $513,000 cost. According to the expert witness, this conversion is capital in nature and is deductible from his final estimate of value.
Both expert witnesses rely primarily on the income capitalization approach; however, each corroborated said approach with other methods of valuation. This court finds the only reliable evidence of value for the subject property solely derives from the income capitalization approach. Taxpayer's appraisal expert's market sales approach fails because the purported comparables are not comparable. A review of the photographs of the comparables, as well as the description offered by the appraiser, indicates little in the way of comparability. For example, the comparables' building sizes range from 17,820 square feet to 54,000 square feet. The largest comparable is approximately one-third the size of the subject and the rest are considerably smaller. Taxpayer's expert witness failed to explain the basis of his adjustment for the significant size differential between the comparables and the subject. Since taxpayer's expert witness failed to submit any evidence to support his adjustments, this court finds said adjustments unreliable.
The municipality's appraisal expert's cost approach is likewise not reliable as either an independent source of value, or for the purposes of corroboration. The subject is twenty years old and requires significant subjectivity in estimating depreciation and obsolescence. Even the municipality's appraisal expert did not believe the cost to build the subject would be a reliable method of valuation. Accordingly, this court rejects both the taxpayer's and municipality's market sales and cost approaches to value.
Taxpayer's appraisal expert witness appropriately commenced his income capitalization methodology by analyzing comparable properties to establish market rent attributable to the subject property. The expert witness first suggested retail comparables to evaluate the office/showroom area of the subject which he deemed retail in nature. Taxpayer's witness then utilized the same method to provide an estimate of market rent for the warehouse space. After adjustments were made between the comparables and the subject, the appraisal expert concluded $12 per square foot market rent for the 90,760 square foot office/showroom (retail) area and $4 per square foot for the 64,855 square feet warehouse area. From potential gross income (PGI) of $1,348,540, the expert witness deducted a 10% vacancy and collection loss factor resulting in effective gross income (EGI) of $1,213,686. The witness further deducted various operating expenses including management, 3% of EGI; structural reserves, 2% of EGI; less commissions, 5% of EGI; professional fees at $5,000; and a total of $61,250 *fn1 for owner's cost to make improvements for tenants, which produced net operating income (NOI) of $1,026,067.
Taxpayer's appraisal expert's capitalization rate derives from specific publications and investment bulletins authored by the American Council of Life Insurance, from which he concluded an overall capitalization rate of 11%. *fn2 These publications present a range of various market indicators; taxpayer's expert witness selected a capitalization rate on the high side of the range. The witness justified the higher rate because of his opinion that Levitz's purported financial difficulties poses a higher risk investment to an investor retaining Levitz as a tenant. This higher risk investment requires a higher mortgage interest rate and a higher return on invested capital. The witness also categorized the subject as a mixed use property to which the appraisal indicators attribute a higher capitalization rate. Applying the capitalization rate to the expert witness's Conclusion as to net operating income, ...