"In the end, selection of highest and best use is central to a proper tax assessment."

One of the most significant issues in any tax appeal case is the determination of "highest and best use," which has been defined by the Appraisal Institute as that legal use which brings the highest price and has a probability of being purchased for that use.  Many people don't understand this concept and its centrality to a uniform system of taxation.

All property in New Jersey must be taxed on a uniform basis of market value.  Property underutilized by an owner must still be valued and taxed at its highest and best use.  The following example tells the story:

Assume there are two identical residential lots of 100 feet by 200 feet.  Under zoning law, each lot could contain a one-story, 4,000-sf home.  Lot A is fully developed with such a home.  Lot B, on the other hand, contains a 1,500-sf older home.  The proper valuation of each lot would be the value of lot A in the market place.

Tearing down the older, smaller house and building a 4,000-sf residence on it becomes the highest and best use of lot B.  For tax purposes, lot B must be valued as if it were fully utilized at its highest and best use.  In this instance, the value of the underlying land is greater than the dwelling on it, because of highest and best use.

The real problem relating to highest and best use occurs when taxing jurisdictions attempt to value industrial properties based on the narrow current use to which it is being put.  The seminal case in New Jersey on this issue involved an automobile assembly plant owned and operated by the Ford Motor Co. in Edison.

In that case, the taxing authorities argued that since the 1.8 million-sf building was built as an automobile assembly plant, and was always used by Ford as an assembly plant, its highest and best use in the market must also be auto assembly.  With such a narrow classification, the assessor could only use the cost approach to value the property.  This caused a significantly higher valuation than would have resulted from using market comparables.  It's well known that the cost approach generally produces the highest valuation.

The New Jersey Supreme Court, in examining the facts of Ford v. Edison, concluded that it would be improper to limit the use of the property to automobile assembly when evidence demonstrated that an active market exists for large industrial plants that can be used for any number of manufacturing and distribution purposes.

The Supreme Court focused on another very important issue in its ruling.  It found that in selecting the highest and best use, the ultimate choice of use in the marketplace must be one that is probable and not speculative or remote.  The mere fact that the owner of the property uses it for a given purpose is not proof of that the market in general would do.  The court stated, "Only the market-driven 'value in exchange,' not the 'value in use' to Ford, should identify the 'highest and best use' of the property."

The case of the Brockway Glass plant in Freehold provides a clear picture of the type of problem the Supreme Court attempted to correct in the Ford case.  The Tax Court of New jersey determined that the one million-sf glass plant had to be valued at its highest and best use, and that use was as a glass plant.  Again, by limiting the highest and best use to glass manufacturing, the Tax Court precluded the use of market comparables and concluded a valuation predicated on the cost approach, resulting in a high assessment.

With the Ford decision, the Brockway decision was reversed, creating a significantly lower assessment because the market approach demonstrated that large manufacturing g plants sell for considerable discounts in the market place.  Very simply, a change in highest and best use designation produced a reduction in value amounting to millions of dollars.

In New Jersey, only the market "value in exchange" matters, whether an owner over- or under-uses a property.  In the end, selection of highest and best use is central to a proper tax assessment.

John Garippa is the senior partner of the law firm of Garippa, Lotz & Giannuario with offices in Montclair, NJ and Philadelphia, PA. He is also the president of American Property Tax Counsel, the national affiliation of property tax attorneys and can be reached at john@taxappeal.com