"It should not be understood as a definitive pronouncement on appraisal practices designed to extract real estate value from the assets of a business or as binding precedent with respect to adjustments of the kind proposed here, should they be offered in other cases with different records."

There are several thousand tax appeals filed each year to the New Jersey Tax Court. Of that number, more than 95 percent are settled prior to trial. In the end, the seven judges of the Tax Court decide and issue opinions for a few hundred cases. The tax court is the lowest trial-level court for an assessment case over $5750,000 and its decisions are always subject to review by the appellate courts in New Jersey. While the decisions are interesting and fact sensitive, they are rarely, if ever, considered precedent setting.

More than three years ago, the Marriott v. Saddle Brook trial took place before the New Jersey Tax Court. At that time, the taxing jurisdiction and the taxpayer each presented valuation testimony. As part of the proofs of the taxpayer, testimony was presented that indicated the Appraisal Institute had introduced new theories and concepts of valuation as to hotel properties. A part of these proofs included evidence of the Course 800 materials offered by the Appraisal Institute. [The 800 course is no longer offered by the Appraisal Institute.]

At the conclusion of the trial, the Tax Court judge indicated that he would like to give the taxing jurisdiction the opportunity to bring before the court as a rebuttal witness, Mr. Stephen Rushmore, the architect of the pre-existing methodology utilized by the tax court. As such, Mr. Rushmore appeared solely as a rebuttal witness. Mr. Rushmore did not prepare an appraisal report, but rather confined his analysis to rebutting the valuation approach of the taxpayer.

Three years after the trial concluded, the tax court judge issued his opinion and affirmed the assessment of the taxpayer without any reduction in value. Moreover, the tax court indicated quite clearly that the decision did not categorically conclude that any one valuation analysis was preferable to another. Sadly, after three years time, there was no discussion of any of the trial testimony other than the conclusion that the assessment was reasonable. In fact, the trial court did not conclude to a discrete value.

In view of this set of facts, it became rather surprising to see the volume of materials published by Mr. Rushmore indicating that the Marriott v. Saddle Brook decision was "important precedent" finally setting to rest the superiority of his approach to valuation of hotel properties. The following discussion has been written so that objective readers can review the actual evidence of the case and decide this issue for themselves.

The Marriott Saddle Brook hotel is an older facility built more than 30 years ago. At the time of the trial, the evidence presented by both parties indicated that the hotel needed to be renovated and refurbished. In fact, several years after the valuation date before the court, the hotel would undergo such a major refurbishment. However, during valuation dates before the court, no such project was underway.

The hotel was valued for assessment purposes at $16 million. the taxpayer's expert valued the hotel at $9 million while the taxing jurisdiction's expert valued the property at $21 million.

The taxpayer's appraisal report relied significantly upon the Course 800 concepts in concluding to a value for only the real property. The taxpayer's appraiser, Mr. David Lennhoff, was one of the development team members of the course and displayed an encyclopedic knowledge of the evolution of appraisal theory as it related to income-producing property through the ever-evolving editions of the appraisal text.

Mr. Lennhoff removed from the income stream those elements of income that ht believed were not related to the real property. In New Jersey, only real property can be assessed for tax assessment purposes.

Since the property was a 30-year-old hotel, significantly in need of refurbishment, Mr. Lennhoff examined whether the hotel was producing a greater percentage of income than its competing properties would expect. His analysis indicated that the subject property's greater drawing power was reflective of the power of the Marriott brand name. This brand name power allowed the property to draw on all of the reservation systems and all of the marketing expertise of the Marriott chain. This power and resultant increase in occupancy and income were due to the "business" and required a deduction from the value of the real property.

Mr. Lennhoff also deducted for start-up costs maintaining that a hotel requires significant investment in time and capital in order to become a business that produces income. Merely constructing the facility does nothing to make it a successful hotel operation. Because the starting point of the valuation was necessarily the revenue from the business operation, these start-up costs had to be removed.

The appraisal expert utilized by the township opined that the Marriott was worth $21 million for assessment purposes. HOwever, during cross-examination, the expert admitted to the court that due to a mathematical error, the value was grossly overestimated and should be reduced to $16.5 million. It is important to note, that this admission of error does not appear in the decision of the court. However, at the time of the admission, the court was clearly aware of the magnitude of the error:

The Court: "So that -- it is a big difference. That's a difference of more than $5 million."

The witness: "Correct, your Honor."

The Court: "in ultimate final value conclusion."

It is also significant to note that his appraisal formed the very foundation of the evidence that the court relied upon to conclude that the hotel was fairly assessed.

Mr. Rushmore's testimony was rebuttal in nature, concluding that the approach relied upon by the taxpayer was inappropriate and not supported by the evidence. Mr. Rushmore derided the Course 800 concepts claiming they could not be relied upon by any credible appraisal experts. It is interesting to note that Mr. Rushmore admitted he had never attended the course or reviewed it materials. However, under critical cross-examination of Mr. Rushmore, evidence was produced that Mr. Rushmore's managing director in charge of the West Coast operation of his company, HVS International, utilized the very concepts adopted by the subject taxpayer, in her valuation in another tax appeal case. In that appraisal report of another Marriott hotel, Mr. Rushmore's partner removed much of the intangible value from the tax assessment of the property including name-brand value, and start-up costs. In fact, that other appraisal report was accepted by this tax court as evidence rebutting Mr. Rushmore's testimony. Sadly, after a three-year period of time, the sitting trial judge made no mention of this important evidence in his final decision.

Mr. Rushmore also opined that there was no need to deduct a value from the subject older hotel because of the Marriott "flag" or brand name. To buttress this testimony, Mr. rushmore relied upon 16 luxury hotels throughout New Jersey to demonstrate that the income stream in Saddle Brook was no different from these other quality name-brand facilities. However, the testimony by Mr. Rushmore was sadly deficient in that regard. He was completely unable to:

1. identify where the hotels were located
2. identify how distant they were from Saddle Brook, New Jersey
3. describe how a customer would travel from those hotels to Saddle Brook.

Finally, in a startling admission to the court he admitted that he had never even inspected these relied-upon facilities. In fact, Mr. Rushmore admitted that the only time he had ever inspected the subject Saddle Brook hotel was the night before his testimony before the court. This evidence was the cornerstone of Mr. Rushmore's opinion that there was no justification for a reduction in value for the Marriott "flag."

Perhaps the most telling part of the case, and an insight into the mind of the court, is revealed by the court's question to counsel as follows:

"Ultimately are we going, if we accept in a case like this, the contention that the Marriott name increases business value by a certain extent? Or are we going to have Donald Trump come in here and say, 'oh, this property is not worth the capitalization, it's worth less than the capitalization of the income because I, Donald Trump, have given my name to it and you should give me 20 percent off the otherwise demonstrable value of the property because it's a Trump property.' What the -- where does this go?"

This question clearly displays a mind set relating to tax policy and not valuation theory. In fact, the concluding paragraph of the decision demonstrates the fact that after three years, the trial judge himself saw fit to say that the decision was only limited to the facts before him and was not a comment on the validity of any methodology.

It bears emphasis that this decision is based upon the consideration of the reasoning and supporting data addressed in the record of this case for the particular adjustments proposed. It should not be understood as a definitive pronouncement on appraisal practices designed to extract real estate value from the assets of a business or as binding precedent with respect to adjustments of the kind proposed here, should they be offered in other cases with different records." Cheasapeake Hotel v. Saddle Brook Tp. 22 N.J. Tax 525, 536 (Tax 2005).

We appreciate Mr. Rushmore's tenacity in defending his theory. However, during cross-examination, he indicated that he presently owned more than 18 hotels. We are also aware of the fact that a most significant part of his appraisal practice is devoted to producing appraisals devoted to financing. However, for the appraisal purposes in New Jersey, only the value of real property can be taxed for assessment purposes.

In the months subsequent to the decision, Mr. Rushmore has written extensively and spoken at length on the precedent setting nature of the case and the primacy of his methodology over the Course 800 concepts. Objective readers can evaluate the decision as well as the testimony. In the end, appraisal theories evolve over many years. It is critical to note that the courts did not accept Mr. Rushmore's technique when it was first introduced. Only after a number of years and critical review was it properly accepted.

The statements made or opinions expressed by author is in Fair & Equitable do not necessarily represent a policy position of the International Association of Assessing Officers. IAAO actively seeks to represent all points of view on issues that are important to its members.

John Garippa was trial counsel for Marriott in the Saddle Brook case. He is the senior partner of Garippa, Lotz and Giannuario, with offices in Montclair, New Jersey, New York City and Philadelphia. He is also President of American Property Tax Counsel, the national affiliation of property tax attorneys.