Venture 17 v. Hasbrouck Heights, No. 000844-2009; Tax Court; opinion by Andresini, J.T.C.; decided and approved for publication January 28, 2013. DDS No. 35-5-8885 [30 pp.]

Plaintiff, Venture 17, L.L.C., the owner of a multitenant office building located in defendant borough, Hasbrouck Heights, challenged the local property tax assessment for tax year 2009. Defendant counterclaimed that the assessment was less than true value, and demanded judgment to increase the assessment.

The local property assessment on the subject property for tax year 2009 was: land: $1,611,300; improvements: $2,903,600; total: $4,514,900.

Both parties presented appraisal reports and offered testimony from experts. Both litigants acknowledged the income approach to valuation is the predominant method of valuation for income-producing properties. The subject property was sold for $2.15 million in August of 2009.

Defendant’s expert report used both the sales comparison approach and the income approach to reach a fair market value. The taxpayer’s expert’s report focused on the income approach. However, at trial he testified to giving weight to the sales comparison approach due to the proximity of the August 2009 postassessment sale and parity between the sales price and his income-approach analysis. In the opinion of the plaintiff taxpayer’s expert, the subject property had a market value of $2,282,000 for 2009 (incorporating certain stipulations). Defendant’s expert report used both the sales-comparison approach and the income approach to reach a fair market value of $4.9 million for the 2009 tax year.

The court finds that plaintiff produced sufficient evidence to overcome the presumption of validity attached to the assessment so as to allow the court to make an independent determination of the value of plaintiff’s property.

Held: In valuing plaintiff’s office building, the Tax Court found the sale of the subject property as an unreliable indicator of market value. Instead, the Tax Court analyzed the expert appraisers’ competing capitalized income approaches, making its own independent determination of value. The Tax Court reduced the assessment.

Plaintiff alleges that the sale of the subject property was a bona fide, arm’s length transaction between willing buyer and unrelated seller, neither under any constraint, acting in their best interest, and there were no unusual circumstances surrounding the purchase price. Plaintiff’s expert, therefore, relied on the sale as corroborating his value determination. On the contrary, defendant alleges that the sale of the subject was not a bona fide sale and there were outside factual factors that render the price to be unreliable.

The court finds that the seller, although not under duress, was unusually highly motivated to sell the property. This motivation is evident from the real estate broker’s testimony that one of the partners of the seller corporation had recently passed away and the other members were contemplating retirement. Furthermore, the lease back to the seller is a special factor that affects the purchase price. Finally, the sale of the subject took place in July 2009, and negotiations did not take place until more than six months after the valuation date at issue. The sale of is, therefore, an unreliable indicator of market value. The court rejects the use of such sale as indicating or corroborating the value of the subject property for tax assessment purposes for tax year 2009.

The comparable sales used by defendant’s expert were of properties that contained leases. Defendant’s expert failed to investigate what effect, if any, the leases had on the sale of the comparable properties. The court therefore rejects the sales-comparable approach as developed in this case.

Under the income approach, the steps involve estimating the property’s gross rental income, which should reflect the market rents, then deducting an allowance for vacancy and collection loss resulting in gross income. Thereafter, operational expenses are deducted resulting in net income which is capitalized to arrive at the property’s value to an investor. The court determines that the appropriate valuation method is the income approach.

Central to an income analysis is the determination of the economic rent, also known as the market rent or true rental value. The actual rental income realized on the property may be below market rates. ??However, actual income is a significant probative factor in the inquiry as to economic income. ??With respect to the determination of market rent, the court finds that both expert witnesses provided comparable rentals requiring significant subjective adjustments. There is sufficient sampling of comparables from which the court can determine market rent. The comparable leases used by plaintiff’s expert are a significant probative factor toward economic rent. However, agreed-on rental increases in future years incorporated into a lease in a base year need to be stabilized and integrated into the calculation. Defendant’s expert, on the other hand, failed to substantiate most of the data in his report. Here, defendant’s expert’s opinion and comparable leases are given little, if any, weight.

For tax year 2009, the Tax Court clerk is directed to enter judgment, in accordance with this opinion, as follows: land: $1,611,300; improvements: $1,769,200; total: $3,380,500.

For plaintiff — Steven R. Irwin (The Irwin Law Firm). For defendant — Steven D. Muhlstock (Gittleman, Muhlstock & Chewcaskie).