"The facts lay out an opportunity for assessment reduction across a wide class of property.  In a down market, it may be the only solace."

Each year the savvy property owner will examine how the market has changed and whether those changes cause their property to be over assessed.  The dynamic changes that have taken place in New Jersey underscore the need for this analysis in the coming year. As in past business cycles, not all property has changed in value at the same rate. In fact, while some property segments remain strong in value, other segments have markedly deteriorated. The segments of the marketplace that have been most affected by the downturn in the economy are the commercial office market, hotels, and assisted living facilities. These segments have not only failed to increase in value over the past 12 months, in many instances they have deteriorated.

The deterioration of the commercial office market is a direct result of corporate downsizing. Interestingly, about 32% of all vacant commercial space in New Jersey is sublet space. Thus, all too often landlords have not yet felt the full impact of this vacant space. In an effort to salvage some vacant space expense, corporate tenants will make deals at prices lower than the landlord would charge.

Thus, the landlord will ultimately feel the price competition. New Jersey’s commercial office market is stuck in the worst slump in years. The state’s overall vacancy rate reached 20% in the last quarter and, disappointingly, there is currently no evidence that this situation is improving.

For the hotel industry, business has suffered since the 9/11 attacks. While there was some increase from the low points after the attack, current occupancy rates are still lagging significantly behind as business travel budgets have been cut.

In the assisted living industry, the building boom of the last several years has significantly eclipsed current demand. Occupancy rates are currently less than 83%, a level considered inadequate to generate a return on equity.

While these segments of the real estate market have lagged in this business cycle, the residential market throughout New Jersey has boomed at an unprecedented rate. It is not unusual to see communities in this state where residential values have increased at a rate of 10-15% a year for the past several years.

The boom in residential real estate has caused equalization ratios to plummet. Equalization ratios are calculated using commercial and residential property sales. Since most of the sales in any municipality are residential, the ratio is strongly skewed toward whatever is happening in the residential market. As residential sales prices skyrocket, the underlying ratio measuring the relationship of assessment to market value falls with each annual increase in residential value. Therefore, while a community might assess all property value at an equalized ratio of 90% in 2002, that ratio could easily fall to 75% in 2004 in that same community where there is a strong residential base.

The result of this ratio change on tax assessments is significant. By law if a property is worth $100,000 and the equalization ratio is 90%, the assessment should be $90,000. However, if the property is worth $100,000 and the equalization ratio falls to 75%, the property should be assessed at $75,000.

Using the same example, if the fair market value of the property falls from $100,000 to $90,000 and the ratio falls to 75%, the property should be assessed at $67,500. This simple example demonstrates the importance of the changes that have taken place in New Jersey over the past year and why there is a pressing need for owners to examine changes in the market and compare them to their tax assessments.

Taxing authorities will not voluntarily reduce assessments as these equalization ratios decline. Only through the proactive step of filing a tax appeal within the statutory deadline period can taxpayers properly protect their rights to a fair assessment. In the event that an appeal is not filed, the assessment cannot be changed for the balance of the 2004 tax year.

Property tax appeals can be filed for the 2004 tax year any time between January 1, 2004, and April 1, 2004. Recognizing the impact of this soaring residential market on equalization ratios, many sophisticated owners will understand that they must file tax appeals in order to secure an equitable and uniform property tax assessment.

The preceding set of facts lays out an unusual opportunity for assessment reduction across a wide class of property. In a declining market, it may be the only solace available.

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