Window of Opportunity
As published by Real Estate New Jersey, January 2003, By John Garippa
An unusual confluence of events makes the filing of tax appeals this year an opportunity that should not be missed. Owners and managers of all types of properties should be aware of this as they review the need to file tax appeals by the statutory deadline of April 1, 2003. The purpose here is to examine this confluence of events that has affected several types of property for tax assessment purposes in this unusual year.
The first event has been taking place over the past 12 months - the deterioration of the commercial office market throughout the state. While pockets adjacent to the Hudson River remain relatively strong, the balance of the commercial office market has taken a direct hit from the downturn in the business cycle.
But oddly enough, the owners of most of these properties haven't felt the decline because of long-term leases. Rather, it's the tenant/taxpayer who has felt the sting of the decline. A review of the sublease market bears out the fact that many properties leased at $30 psf two years ago are now being sublet in the low $20-psf range. This loss in value can be partially recouped by filing a tax appeal.
The second event is the combination of an overheated New Jersey residential market and the state-published equalization ratios. In most communities in the state, single-family residential properties continue to be sold at ever higher levels. It's as if those who have abandoned the stock market decided to invest that money in their own homes. This, coupled with low mortgage interest rates, has created a red-hot market.
Under state law, the State Director of Taxation must each year gather all useable sales from each municipality and compute the overall ratio of assessments to all sales for each municipality. In most cases, the residential component of the ratio comprises at least 90% of all useable sales. Commercial sales comprise less than 10%.
The purpose of this study is to promote the equalization of property assessments throughout a taxing jurisdiction. Each year, the lawful level of assessment in a taxing jurisdiction is measured using the appropriate equalization ratio. However, the taxing authority doesn't always apply the current equalization ratio to last year's assessment in setting the assessment for the current year.
For example, let's say that in one municipality, last year's equalization ratio was 100% and this year's ratio is 50%. This lowered equalization ratio occurred because of the inflated sales prices in residential property. In this example, a taxpayer's commercial property will probably be assessed at 100% of its last year's value, instead of 50%. Without filing a tax appeal, the lowered assessment ratio will not come into play for the commercial property owner/tenant.
The third event involves the Appraisal Institute, which recently changed the valuation techniques for certain types of income- producing property. The changes, codified in the Appraisal of Real Estate, spell out the need to deduct certain additional elements of expense from a property's income stream.
These additional deductions, labeled as "intangibles," cover such items as pre-opening expenses and assembling a workforce in properties like hotels, assisted-living facilities, and other name-branded real estate. In all of these categories, traditional income from a property must show an additional deduction for what is now considered an "intangible." For many properties, the practical result will be a reduction in property tax assessments, especially when coupled with the lowered assessment ratio. In all too many cases, these reductions will not be forthcoming without an appeal.
The confluence of events laid out here presents a rare window of opportunity for commercial taxpayers to obtain significant assessment relief. However, the failure to file an appeal by the statutory deadline of April 1, 2003 will irrevocably close that window for this tax year.
John Garippa is the senior partner of the law firm of Garippa, Lotz & Giannuario, with offices in Montclair, New Jersey and Philadelphia. He is also the president of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. He can be reached via email at john@taxappeal.com.