Elizabeth Center Apartments Urban Renewal Corporation v. City of Elizabeth, No. 000892-2006; Tax Court; opinion by Brennan, J.T.C.; decided and approved for publication April 25, 2013. DDS No. 35-5-9764 [18 pp.]

This appeal concerns the impact of nondeed restrictions on the value of real property developed as low- to moderate-income cooperative apartment residences.

Elizabeth Center Apartments Urban Renewal Corporation (taxpayer) contests the 2006 and 2007 real property tax assessment on a low- to moderate-income cooperative apartment complex located in Elizabeth (subject property). The subject property consists of 4.65 acres and is comprised of three five-story brick apartment buildings and one 12-story brick apartment building containing 260 apartment units.

The taxpayer is a not-for-profit cooperative housing corporation organized for the sole purpose of providing low- and moderate-income housing pursuant to the requirements of the National Housing Act. The taxpayer purchased the property in 1966 and formed a restrictive regulatory agreement, Bylaws and articles of incorporation in accordance with the requirements of the Federal Housing Administration (FHA). The taxpayer secured a loan from the Department of Housing and Urban Development (HUD) to construct the improvements on the property. The subject property has been managed exclusively to benefit low- and moderate-income individuals and families as determined by the rules and regulations promulgated by the FHA and the HUD.

In exchange for financing, the FHA and HUD provide federal oversight and guidance as to all of the taxpayer’s operations. The contract between the FHA and the taxpayer is the regulatory agreement, which prohibits amendment of the bylaws or certificate of incorporation without the written permission of the FHA. Section 23 of the regulatory agreement states that the covenants and agreements between the taxpayer and the FHA run with the land so long as there is a mortgage on the subject property that is either insured or owned by HUD.

The purchase price of a membership certificate representing the right to a single housing unit was established in 1966 and, through the bylaws and other restrictions imposed by the FHA and HUD, the value of a membership certificate essentially remains the same on subsequent sale. A member builds equity by paying down the mortgage principal and is able to recoup costs for approved improvements made to the unit, but the membership certificate will never appreciate in market value and no member will profit on its subsequent sale.

Both the taxpayer and the city engaged the services of professional real estate appraisers to provide opinions of value of the subject property for the tax years in dispute. Due to the restrictions limiting the sales price of a membership certificate at the subject property, the experts disagreed as to whether the subject comparable sales approach was applicable. The experts also disagreed on what weight, if any, to give the restrictions when determining the property’s true value.

Held: Nondeed restrictions controlling the sale price of a membership certificate of a cooperative developed as low- to moderate-income cooperative apartment residences have resulted in a unique and limited market in which to determine true value. The appropriate method to determine the restricted cooperative’s true value is the cooperative sales comparison approach based on the sales of membership certificates within the cooperative property.

The court finds that the taxpayer presented sufficient evidence to overcome the presumption of validity attached to the city’s original tax assessment and to permit the court to make an independent determination as to the value of the subject property. Both the taxpayer and the city’s expert acknowledged that the subject property as restricted is a market in and of itself. The court is satisfied that the true value of the property must reflect the restrictions that limit the market value of the units.

The valuation approach to be used when assessing a cooperative apartment complex was explored in Southbridge Park Inc. v. Borough of Fort Lee. The Southbridge Park court rejected valuation of a cooperative based on an income basis and considered a market sales approach based on the component parts of the subject property. Here, the search for comparable sales was problematic because while the subject property gives the appearance of a typical urban multifamily residential property, the restrictions that govern sales distinguish it from those comparables. With a lack of comparable outside sales, the focus shifts to sales within the subject property. There were 28 such sales within the period of assessment and these were the source of the computed values presented by the appraisers using the Southbridge Park approach. However, unlike in Southbridge Park, the subject property’s restrictions prohibit a negotiated purchase price based on market forces. The court must therefore consider the impact of the affordable-housing restrictions on the valuation approach to be adopted and the weight that those restrictions are to have when ascertaining true value.

In Prowitz v. Village of Ridgefield Park, the Appellate Division held that the resale restriction is a factor that must be considered in fixing the assessment. The court finds that the same holds true for the taxpayer in this matter. Although individual taxpayer members are enjoying home ownership at below-market financing, they do so without the ability to make a profit at the time of sale. This in turn helps to perpetuate the city’s low- to moderate-income housing stock. Although the Prowitz decision involved a deed-restricted property, the court does not interpret that decision to exclude the nondeed restrictions imposed on the taxpayer.

The restrictions imposed on the resale price of a membership certificate at the subject property are at odds with the concept of market value based on a fair and bona fide sale by private contract. For reasons associated with public policy, the full and fair value of a taxpayer membership certificate is artificially depressed by the limitations imposed on the sale of a member’s share as dictated by the bylaws, unlike properties available in a free market. The court finds that this situation has created a limited and unique market in which to determine the subject property’s true value. The court also finds no plausible reason to deviate from the accepted method of appraisal for cooperative apartments as determined in Southbridge Park.

The court accepts the true value of the subject property to be $5,222,065 for 2006 and $5,364,484 for 2007.

For plaintiff — Amber N. Heinze and Kevin S. Englert (The Irwin Law Firm). For defendant — Robert D. Blau (Blau & Blau).