A busy week in Tax Court - Part 3

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!