How to value thee? The NJ Tax Court counts the ways . . . .
Under New Jersey law all real property is required to be assessed as of October 1st of the preceding tax year at its “full and fair value,” i.e., what “it would sell for at a fair and bona fide sale by private contract on October 1 [of the pretax year].” So, how do you value a property that has not sold as of October 1st?
Residential properties are typically valued using the sales comparison approach. While the sales approach can and has been used in valuing commercial properties, the preferred method of valuing these properties is income capitalization approach, even where owner occupied. The third valuation method is the cost approach, which is sometimes used for special purpose properties or properties that have been recently improved.
Every now and again a case comes along that presents unique challenges to using the traditional approach. In Aliotta v. Twp. of Belleville, the Tax Court was confronted with such a case. The subject property is a 2.69-acre lot that is improved by a single-family home. The area located behind the home is used as a Contractor’s Yard portions of which are leased to various commercial tenants that use the leased land to store, park, repair or maintain their commercial vehicles. This area also includes some improvements such as a 2,280 sf Quonset Hut. Also, there are two trailers both of which have their own utilities. As a result of an earlier decision by the court, theses structures, owned by various tenants of the property, were deemed to be taxable real property.
The appraisal experts for both the property owner and the Township agreed that the highest and best use of the property is as a Contractor’s Yard since it generated the most income to the property. There was some disagreement as to the residence, but the Court found that the highest and best use of the property, as vacant and as improved, is its current use as a contractor’s yard with the residence.
Plaintiff’s expert used three valuation approaches: (1) a “blended” approach of both the sales comparison and income approach for valuing the land; (2) the cost approach for the trailers and the Quonset hut; and (3) an “summation” or “extraction” method for valuing the residence by first using a sales comparison approach of other single-family homes, then extracting a ratio of the sales price of the improvement only based on the allocation of the comparable’s assessment to improvements, and then arriving at a value for the residence based on the extracted sale price of the improvements. Belleville’s expert used only the income approach for all of the components of the property.
The court concluded that a hybrid valuation approach was reasonable because of the property’s unique uses. For valuing the Contractor’s Yard, the court found that income approach is the most appropriate method of valuation. However, for the improvements in the Contractor’s Yard, i.e., the Quonset hut and the trailers were more appropriately valued by utilizing the cost approach. While the home could have been valued either under the sales comparison approach or the income approach, the court found that the evidence supported use of the income approach with adjustments for condition and location.
A copy of the case may be found here.
This opinion, which has been approved for publication, shows us that the Tax Court is not averse to being flexible when it comes to valuing unique properties.
For more on cases involving valuation issues see:
The Borgata gives new meaning to the saying that “the house always wins.”
