Turning a “Blind Eye” to Property’s Actual Use Sinks Taxpayer’s Appeal

The New Jersey Tax Court’s recent decision in Forsgate Ventures IX, LLC v. South Hackensack mirrored many aspects of the its earlier opinion in Clemente v. South Hackensack from 2013, and again reminded appraisers of the importance of the highest and best use analysis.  Forsgate challenged the assessments imposed by South Hackensack for tax years 2009, 2011, and 2012.  The property subject of the appeal is located at 45 East Wesley Street in South Hackensack.  For those familiar with the area, it is the home of Restaurant Depot.

At trial, both parties presented a real estate appraisers who agreed that the highest and best use is the current use, as improved, but they differed on how the actual use of the property should be characterized.  Plaintiff’s expert characterized the property as an industrial warehouse while defendant’s expert characterized the property as a large discount retail store.  Following the testimony of both experts, the court agreed with defendant’s characterization of the property as a large discount retail store.  According to the court, “plaintiff’s expert turned a blind eye to the actual use of the property.”  The subject property was being utilized to serve nearly 800 customers on a daily basis, provided 195 outdoor parking spaces (46 indoor), customers loaded their carts or dollies with goods, and paid for them at checkout counters, all of which were characteristics of a large discount retail facility, not industrial/warehouse.

Although the subject property differed from traditional large discount stores in some aspects such as the number of parking spaces, the court indicated that the number of parking spaces “does not solely dictate the actual use of a property.”  Moreover, an amended site plan was filed with the Township to meet increases levels of consumer traffic.  The property may have less number of parking spaces as compared to the minimum required of a traditional retail or office property, but it had a significantly higher number of parking spaces as compared to the minimum required of an industrial warehouse property.

After determining the property’s highest and best use, the Tax Court moved forward to assess the method of valuation employed by both experts.  Plaintiff’s expert used the income approach in conjunction with sales comparison approach.  Meanwhile, defendant’s expert used the income approach as support for the cost approach.  Despite utilizing the appropriate method of valuing the property, plaintiff’s expert’s income approach was flawed because it relied on comparable leases for industrial/warehouse properties.  Having determined that the subject property’s highest and best use is a large discount retail store, plaintiff’s expert’s use of industrial/warehouse leases to determine the market rent was “a fatal difference that cannot be overcome by any number of adjustments.”  Defendant’s market rent analysis was derived from leases of large discount retail stores but failed to correctly identify the subject property’s size.  Thus, the adjustments for size made by defendant’s expert was improper and erroneous.

As evidenced in Forsgate, the highest and best use analysis is the foundation of an expert’s report.  Like the domino effect, once plaintiff’s highest and best use analysis was determined flawed due to the expert’s oversight of the property’s actual use, the expert’s entire appraisal report came down crashing.  Future litigants and experts are cautioned to consider reconciling the property’s highest and best use with the property’s present actual use.  Although the actual use of the property is not the sole determinative in concluding the highest and best use of a property, it can be a strong consideration especially when the present use meets all four criteria of the highest and best use analysis (i.e., legally permissible; physically possible; financially feasible; and maximally productive).

A copy of the recent published opinion in Forsgate Ventures IX, LLC v. South Hackensack can be found here.

A summary of the Tax Court’s similar decision in 2013 in Clemente v. South Hackensack can also be read here.