Four New Jersey municipalities, a deputy tax assessor and a handful of individual taxpayers have filed a lawsuit seeking to overturn a recently-enacted law which would grant hospitals a tax exemption in exchange for a direct per-bed payment to the municipality in lieu of traditional property taxes.
The case was filed in Mercer County Superior Court, but Tax Court Presiding Judge Mala Sundar was transferred temporarily to the Superior Court for the purpose of hearing the case. Understandably, the court considered the case to be one in which expertise in taxation was desirable, thereby triggering the Tax Court's limited jurisdiction. Cross-motions for summary judgment have been filed, and a hearing is scheduled for mid-November.
The plaintiffs' primary argument is that the New Jersey Constitution requires any exemptions to be granted by general laws - essentially, the law singles out hospitals for preferential tax treatment. The law, which was enacted in response to the Tax Court's 2015 decision finding that the Morristown Medical Center was not entitled to a property tax exemption because that for-profit activities were conducted at the hospital. This watershed case led to a flurry of litigation in the Tax Court as municipalities sought to recapture revenue from hospitals that had been previously considered exempt. The new law under attack brought an end to the appeals and provided the hospitals with an exemption provided they make "community service" to the municipality. A portion of the fees go to the county. However, none is passed on to the school district, which is typically commands the largest portion of the property tax levy.
Why does this case matter? Quite simply, the revenue to municipalities under traditional tax structure would far exceed the "community service" payments permitted by the law. As New Jersey taxpayers are all too aware, one less dollar that someone else pays in property tax means that the rest of the property owners in town will be picking up the tab. The esoteric question animating the legal discussion is thus - should property owners bear a portion of the cost of a local hospital? Or, should the users, insurers, employees and others associated with the hospital bear the cost in the potential form of increased care costs, decreased salaries, or increased insurance premiums? To be sure, there is certainly some benefit to be had from having a local emergency room available to a township, which is part of the "quid pro quo" analysis for granting an exemption in the first place. However, is the windfall to hospital stakeholders justified by the mere presence of a hospital in town? These questions may not be answered or even addressed in the course of the litigation, but the stakes in this challenge are unquestionably high regardless.
The case is captioned Colacitti et al. v. Murphy, docket no. MER-L-738-21
Most New Jersey tax appeals boil down to a classic battle of the experts. The taxpayer's appraiser squares off against the municipal appraiser, and the Tax Court decides who has the better part of the argument. While that's something of an oversimplification, it catches the essence of the trial. It also tends to some measure of predictability in the process, and facilitates settlement of many appeals.
Still, there are cases that can't be settled for one reason or another. If that's the case, one of the most important decisions a tax appeal litigant will make is the choice of appraisal expert. If you hire someone unfamiliar with the dynamics of appraising for Tax Court or inexperienced as a testifying witness, you run the risk of putting your claim in serious jeopardy. Even if the assessment is patently wrong, the appraiser has to show it, and then go on to prove the true value of the real estate.
What does all this have to do with the case recently decided by New Jersey's Appellate Division? Plenty. In VNO 1105 State Hwy 36, LLC %Stop & Shop v. Township of Hazlet, a property owner retained an expert who also happened to become the tax assessor for a nearby municipality. Shortly before the trial, the township moved to bar the taxpayer's expert on the grounds that tax assessors should be categorically barred from testifying in opposition to another tax assessor. The Tax Court agreed with the municipality and barred the expert from testifying.
The Appellate Division disagreed, and reversed the Tax Court's order. The appellate judge writing for the panel noted that there was no indication that there was any side-switching or breach of confidentiality that would require disqualifying the expert, and found that the public interest did not automatically require the disqualification of a sitting tax assessor from testifying as an expert on behalf of a taxpayer.
This is definitely good news for taxpayers, because the number of truly capable appraisal experts well versed in New Jersey property taxation is small; and the loss of even one well known and respected appraiser to property owners is significant. Practically speaking as well, the outcome makes sense; absent some genuine breach of confidence, there is no real reason to bar such individuals from testifying for property owners in other municipalities.
The full opinion can be accessed at the Tax Court's website here.
What can we learn from yet another New Jersey Tax Court opinion rejecting a taxpayer's assessment challenge? More than you might think.
In Faber v. Toms River, a self-represented taxpayer challenged her assessment by pointing out discrepancies between the property and the property record card, and by testifying about three sales of similar homes in town.
The property owner first argued that the property record card was wrong, and that both the size of the home and the lot were overstated. However, she attempted to prove the discrepancies through the testimony of the tax assessor, who had not set the assessment and was not subpoenaed to appear at trial. As a result, the assessor had little knowledge of the subject property, and the court found that the taxpayer failed to offer any evidence to support her claim as to either the square footage or the lot size except her own testimony to that effect.
The taxpayer also testified about three properties she identified as similar. However, the Tax Court rejected these sales as valid indicators of the subject's value for various reasons, including differences in location, style and lack of support for adjustments the taxpayer asserted were required.
What can we learn? The first highlight is the difference between a proceeding at the various county tax boards and Tax Court. Tax assessors are required by regulation to appear at the tax board hearings for their taxing district; This is why the Tax Court recognizes a taxpayer's right to call the assessor as a witness at their county hearings so as to avoid a dismissal for lack of prosecution. By contrast, there is no such requirement in Tax Court, and the taxpayer must use the proper procedures (i.e., a trial subpoena) to compel the assessor's appearance and testimony. Had this taxpayer done so, the assessor may have had more meaningful information to present to the court.
Second, we see the difficulties in challenging the assessment methodology. Had the plaintiff been aware, there is a possibility that errors in assessment - including in the size of the home or lot - may be corrected. In fact, such errors may even be corrected retroactively for up to three years preceding the year of the challenge. Such errors may be difficult to quantify and assess whether correction will yield a meaningful benefit; experienced advice (or lack of it) can make all the difference in the outcome.
Third and finally, it is a reminder that the taxpayer bears the ultimate burden to demonstrate that their assessment is wrong. It's not enough to show weaknesses in the assessment or in the town's comparable sales. The taxpayer must make a compelling case that their property is over assessed. Hands down, the best way to do that is to have an experienced property tax attorney and expert, who are familiar with the Tax Court's standards of proof and the evidence and arguments that have the best chance to carry the day, whether at the bargaining table with the town, or before the Tax Court.
Before too long, assessments will be issued for 2022, first in Monmouth County and then for the rest of New Jersey. If you think you might be over assessed or incorrectly assessed, don't wait - contact us for a free consultation as to whether a 2022 appeal might make sense for your New Jersey real estate.
You can read the full case here:
011106-2020 - Joanne Faber v. Toms River Township (njcourts.gov)
This is the long-delayed and final entry in this series of posts discussing cases published by the Tax Court of New Jersey during the first week of 2021. Much has happened since that time, but the cases are still relevant. Without any further ado...
The third published Tax Court case involved the trial of a nursing home for seven tax years, Eagle Rock Convalescent Center v. Twp. of West Caldwell, Nos. 6780-08, 8154-09, 2089-10, 10834-11, 264-12, 868-13 & 5687-14 (Tax Court January 6, 2021). For those unfamiliar with the practice, each tax year is a separate, appealable event, and in the case of complex commercial properties (such as a nursing home) where large tax dollars may be at stake, it's not unusual for the case to take many years to resolve. Seven years is definitely on the higher end of the spectrum, but it's not the limit by any stretch.
Nursing homes are something of an enigma for property tax valuation; the Tax Court views them as income producing property, but despite its preference for the income approach to value such property, the court has consistently found the income data to be lacking and turned to the cost approach to value them. This is, in part, because the Tax Court recognizes that the fees charged by the nursing home are only partly for the privilege of residing in the facility, and also because the facilities are almost universally owner-occupied
In this case, the taxpayer's expert utilized the Rushmore methodology, typically applied to hotels to extract the business component of the nursing home's income, leaving that portion attributable to the real estate to find value for tax purposes. However, the Tax Court again rejected the income approach. The court found that the provision of a patient mix at comparable facilities was insufficient by itself, but suggested that patient mix and actual revenue might suffice to produce a reliable market income. Moreover, the court found that the expert's analysis did not strip out all components of value from the revenue stream aside from that attributable to the real estate. With these flaws, the income approach failed.
Turning to the cost approach, the Tax Court once again rejected the use of computerized cost estimators as insufficiently documented and repeatable for use in developing replacement cost figures. As a result, the Tax Court found itself without sufficient evidence to find value for the property for tax years 2008-2010 and 2013 - 2014.
However, since the municipality used a second expert for tax years 2011-2012 who used the manuals to calculate a replacement cost by hand, the Tax Court did find value for those years. The values concluded by the Tax Court exceeded the assessments, but the municipality filed no counterclaim in 2011, a revaluation year (absent unusual circumstances the court cannot increase a revaluation assessment unless a counterclaim has been filed) and the value fell within the common level range for tax year 2012. As a result, all tax years were affirmed.
This marks the end of this series, but keep checking back for more Tax Court case commentary, as the Tax Court has been busy in these early months of 2021!
Our second installment from the Tax Court's busy first week of 2021 is a twist on an exemption opinion penned by Presiding Tax Court Judge Mala Sundar, P.J.T.C. The case, Township of Freehold v. Centrastate Healthcare Services, Inc., Nos. 000047-2016 & 000048-2016 (Tax Court January 5, 2021) marks further fallout from the Tax Court's opinion in AHS Hospital v. Morristown, 28 N.J. Tax 456 (Tax 2015), though this time falling in the favor of the taxpayer. Let's dig in a little to this one.
First, a bit of history. The subject property was transferred to a for-profit entity in 2008, though still used as a clinic for indigent patients. The municipality filed an appeal from the "failure to impose" an omitted assessment for 2014 and 2015. The municipality initially moved for summary judgment on the grounds that a for-profit entity was not eligible for a tax exemption. The Tax Court initially denied that motion, and then later granted it, leaving open the issue of valuation for trial. After a change in counsel, the taxpayer moved for reconsideration of the grant of partial summary judgment rescinding the exemption on the grounds that the Tax Court's decision in another hospital exemption case mandated a dismissal, namely Borough of Red Bank v. RMC-Meridian Health, 30 N.J. Tax 551 (Tax), motion for leave to appeal den., 238 N.J. 455 (2019). In that case, the Tax Court found that a similar municipal appeal had to be dismissed, as the court lacked jurisdiction to consider the appeals. The court held that the municipality should have filed an appeal under N.J.S.A. 54:3-21 from the original assessment, and not from a failure to impose an omitted assessment.
With that background, the outcome of the case was straightforward. Because the statute for the termination of an exemption requires the omitted assessment to be imposed in the year that the change prompting the termination occurs, the court found that there was no basis for reliance upon the standard omitted assessment procedure in a subsequent year. Rather, since the exemption had been granted for that tax year, there was no other change at the property and the township had not filed a timely appeal, the taxpayer was entitled to rely on that exemption. Since the valuation claims could also not survive, the Tax Court directed the entry of judgment dismissing the appeals with prejudice.
While the rest of us were preoccupied with goings on elsewhere, the New Jersey Tax Court was quietly working away, bringing in 2021 with a trio of published decisions.
The first, authored by Tax Court Judge Mary Siobhan Brennan, J.T.C., involved mutual appeals by taxpayer and municipality in 30 Journal Square Partners, LLC v. City of Jersey City, No. 009666-2020 (Tax Court December 30, 2020). In this case, the municipality filed its appeals in early June at the county tax board, and the taxpayer filed directly to Tax Court on the July 1 filing deadline. The taxpayer contacted the county board, requesting that the municipality's appeals be dismissed for lack of jurisdiction. While the municipality did not object to a dismissal, the City wanted the right to appeal from the county's judgment to the Tax Court. The taxpayer took the position that the county board was deprived of jurisdiction, and the judgment would be a nullity from which the municipality would not be able to appeal. The taxpayer moved before the Tax Court to have jurisdiction established in the Tax Court, and to required the City to withdraw its county appeals. While the municipality did not contest the Tax Court's jurisdiction, it did insist that the proper procedure was for its appeal to be dismissed without prejudice, to allow it to appeal to the Tax Court and preserve its right to appeal.
The Tax Court confirmed its exclusive jurisdiction, but permitted the City's county appeal to proceed on appeal to Tax Court. The court adopted the reasoning of the Tax Court in another unpublished opinion, wherein the Tax Court allowed an untimely counterclaim to proceed so as to "harmonize" the municipality's right to appeal and the exclusive Tax Court jurisdiction established in the statute.
Practically, the Court's ruling would allow filers to the county board to preserve their appeal in the event that their adversary files at the Tax Court and that party fails to file a timely counterclaim. However, this loophole is not consistent with the plain language of the statute, and it runs contrary to the principle of strictness required with regards to filing deadlines. However, until the Appellate Division, Supreme Court or Legislature speaks on the issue, it appears that county board filers will be protected from losing their claims if their adversary files at the Tax Court and they fail to file a timely counterclaim. You can read the full opinion here:
30 Journal Square Partners, LLC v. City of Jersey City
Stay tuned for parts 2 and 3, which involve a trial encompassing seven years of appeals, and the reconsideration of a reconsidered decision!
It's been an interesting year for New Jersey real estate. Retail and office markets are hard hit by lockdowns and the introduction and ongoing appeal of remote work, and warehouse is the big winner with asking rents at an all time high. What about the residential market for first time homebuyers, or those with newfound freedom to move farther from a workplace? In a word: crazy.
In prime areas, homes hitting the market are snapped up in days or even hours. Bidding wars are common if not the rule, and sellers have almost unilateral bargaining power in negotiating key contract provisions, such as home inspection, mortgage and appraisal contingencies.
How does this translate into a property tax problem? Under normal circumstances, the sale of real property can't be the sole basis to trigger an assessment increase in New Jersey. That's good news when prices are inflated due to bidding wars and high demand, but there's a catch.
Often, if a seller has made significant updates to the home, or if the property in question is a "flip", or a home purchased and renovated within the last few years, the tax assessor has the freedom to increase the assessment on the basis of the improvements and not run afoul of the prohibition on sale-related increases. Even if there's a long lapse in time between the improvements and the sale, many assessors will still increase the assessment after the sale.
As a result, many homebuyers may see surprising increases in their property tax burden next year or even added assessments. Unfortunately, when the sale price of the property is at or above the new assessment, chances of obtaining tax relief by way of assessment appeal are not clear cut.
The best plan is to get informed during the buying process and budget/buy accordingly. If you are looking to buy, we can help you to determine if an assessment increase is a possibility for the home you're considering. If you see or have seen a tax increase after your purchase already, you can contact us for a complimentary evaluation of your situation.
In a recent case decided by the New Jersey Tax Court, a municipality asked for reconsideration of a decision reducing a commercial property's assessment. The property in question was a mixed-use retail and warehouse building, with some mezzanine space in both the retail and warehouse areas. The main issue on reconsideration involved whether the Tax Court should have included the value-in-exchange of the mezzanine space value in the rent for gross leasable area, or given it a separate rent. Since there was no evidence of the value of the mezzanine, argued the municipality, the Tax Court had to affirm the assessment. The Tax Court rejected this argument, finding that the mezzanine space was properly included in the rental value of the main area.
However, this is a case where the issue isn't really the issue. In general, reconsideration motions are a long shot, and not undertaken lightly. In this case, at the time of the trial, the town withdrew its counterclaims and rested on the assessment without presenting any affirmative evidence. This wasn't necessarily the plan, as they had an appraiser present at trial and ready to testify to an appraisal report. Was it a good idea to rest on the assessment? With the number of tax appeals and the cost of commercial appraisals, balancing the risk of resting on the assessment or presenting affirmative evidence is a delicate decision for a town attorney that can cut both ways. Let's explore that issue a little further; but first, let's take a step back.
In a normal tax appeal, the burden of proof rests on the appealing party. That means it's the party that wants to see the assessment changed (usually the taxpayer) who has to provide proof that the assessment is wrong. That proof typically comes in the form of an appraisal and the testimony of a duly accredited appraisal expert. The defending party, on the other hand (usually the municipality), can present evidence of value, but they're not obligated to do anything. Rather, they're entitled to rely upon a legal construct typically referred to as the "presumption of correctness" to which municipal assessments are entitled. This presumption operates on the assumption that municipal officials do their jobs correctly, and therefore the assessment should be right. The defender of the assessment also has the added protection of another hurdle to changing the assessment - a range of value in non-revaluation years where, if the Tax Court or Board of Taxation finds value in that range, the assessment is affirmed. This range of value, set by statute and commonly called the "corridor," allows assessments to be imprecise, but still not subject to revision. Finally, the Tax Court has become increasingly demanding in recent years, making it difficult for appealing parties to carry their burden of proof to alter the assessment in question.
With these legal protections for the assessment, it's easier to see why a defending municipality may choose not to get an appraisal. First, if they have a lot of appeals to defend, the cost of expert reports and testimony can explode, and it might even cost the town less to have a judgment entered than get an appraisal in some cases. Second, the court may not find value if there are significant gaps in the taxpayer's proofs; it's not unheard of for the town's appraiser to fill those gaps with their testimony and enable the court to reach value if they testify. Finally, it's also possible for the town's expert to find value below the assessment. This last scenario raises some difficulty for the town; while they may want to preserve the tax revenue, the town can't simply sit on an appraisal substantially below the assessment and push for the taxpayer's case to be dismissed.
On the other hand, the court may find its way to value without the town's proofs. Those proofs, if entered into the trial record, might increase the court's value conclusion and even potentially sustain the assessment. If the town has already expended the funds for an appraisal, and that appraisal supports or exceeds the assessment, it may not be worth the risk of having the Tax Court bridge the gaps in the taxpayer's appraisal unexpectedly and result in an adverse decision.
Of course, if the case is a residential matter, the taxpayer hasn't retained an expert, or retained an expert unfamiliar with property tax practice in NJ, it's not a great risk. Particularly in smaller cases, the cost of an appraisal, expert or assessor testimony and trial preparation by the attorney may vastly outweigh the cost of any judgment. However, at the end of the day, deciding whether to rest on the assessment is a litigation strategy that demands careful consideration in any case.
Read the Tax Court's opinion here.
On March 19, in light of the COVID-19 outbreak and the resulting public health emergency, the Chief Justice of the New Jersey Supreme Court entered an order extending the filing deadlines for 2020 property tax appeals with the County Boards of Taxation and the New Jersey Tax Court. Instead of April 1, 2020, the filing deadline has been extended to the *later* of either a) May 1, 2020, or b) 30 days after Governor Murphy declares and end to the state of emergency in effect under Executive Order 103. This order does *NOT* toll or extend the statute of limitations for deadlines that have already passed, e.g. the January 15th deadline for Monmouth County Board of Taxation appeals. The March 19th Order is accessible here:
March 19 Order
Subsequently, the Supreme Court entered an Omnibus order confirming this order, accessible here:
On April 7, the Court entered a further clarifying order, confirming that the filing deadline extension applied not only to original appeals of matters to the county boards of taxation and the Tax Court, but also appeals from judgments of the county boards of taxation participating in the Assessment Demonstration Program (at this time, only Gloucester and Monmouth) retroactive to the Court's March 19th Order. The clarifying order is here:
As of now, the State of Emergency declared by Governor Murphy will expire on
It's been a big week for taxpayers in New Jersey - three significant property tax cases came down from the courts in the last week. First, the Appellate Division granted a property tax exemption to the operators of an upscale restaurant on a university campus, reversing the Tax Court's decision below granting summary judgment to the municipality. A published opinion involving a tax case is rare; one reversing the Tax Court even more so, so it's worth taking notice. It's interesting to see the Appellate Division balancing the interests between state higher education and the needs of local government.
Next, the Tax Court re-affirmed the protections afforded by the Freeze Act, ruling that a sale of the property was not grounds for finding a change in value that would void the Act's protection per se. As in many cases, some of the most interesting comments are reserved for footnotes. It's good that taxpayers can rely on the Freeze Act with confidence, particularly given the rise in rolling reassessments and more frequent revaluations. If the Act applies, the town really has a hurdle to get over to prevent its application.
Finally, the Tax Court gave a massive reduction in assessment to the owners of a former corporate headquarters, finding that the property wasn't special use and could be valued as a single-tenant office building. It goes to show that if you can bring the court with you in your highest and best use determination, you have a good opportunity to win your case. It reminded me of a similar case with far more divergent opinions of highest and best use involving a Jersey Shore hotel. Curious folk can read that case here.
What does all this mean? Call me biased, but I think it means it's a good time to make sure you're only paying your fair share of New Jersey property taxes.
Here are the opinions:
Gourmet Dining, LLC v. Union Township et al
160 Chubb Properties LLC v. Township of Lyndhurst
ML Plainsboro LTD Prntshp/Gomez v. Township of Plainsboro