Article

PROPERTY TAX APPEAL DEADLINE IS APRIL 1, 2008
By Kenneth E. Meiser

The nation’s recession, particularly the housing recession, has produced an upsurge in property tax appeals. The property owner that is successful in its appeal obtains both a tax reduction and, in accordance with the Freeze Act, protection from certain future tax increases. The property owner that does not appeal may find future tax bills increased as the municipality scrambles to recoup lost tax revenues.

Options for Pursuing a Tax Appeal

A tax appeal can be pursued in one of two ways. If the assessed value of the property is less than $750,000 then the appeal is filed with the County Board of Taxation with the right of appeal to the Tax Court. If the appeal involves property assessed over $750,000, the appeal may be filed directly with the tax court.

The County Board of Taxation provides the opportunity for a faster decision. By law, without special permission, all decisions of the Board must be rendered within ninety days of the deadline for filing appeals, although there is a right of appeal. The fee for filing an appeal is minimal. However, if all outstanding taxes and charges, including the first quarter taxes, have not been paid, the appeal can be dismissed; this requirement will be relaxed only in rare instances where required in the interests of justice.

Critical to any successful tax appeal is a strong expert report from the property owner’s appraiser. The purpose of the appeal is to determine the true value of the property, i.e., the price a hypothetical willing buyer would pay a hypothetical willing seller, as of October 1 of the pre-tax year. The appraiser’s expert report must be filed at least ten days before the hearing. The initial burden on the property owner that appeals is to overcome the presumption of validity of a municipal tax assessment by presenting evidence sufficient to demonstrate the value of the subject property, thereby raising a debatable question as to the validity of the assessment; in other words, the appellant plaintiff must present evidence sufficient to demonstrate that the appeal is based on sound theory and objective data.

Determining the Fair Market Value of Your Property

There is no one fixed method of determining fair market value. Considerations of comparable sales, income capitalization and possibly replacement costs may be relevant.

The “sales comparison” approach is the principal method used for the valuation of vacant land. When a vacant building is sold to an investor, the impact on the sales price of the vacant condition of the building on the land and the land must be considered. The “sales comparison approach” to valuing property for tax purposes is the process in which a market value estimate is derived by analyzing the sales price for similar properties that have been sold recently and comparing these properties to the subject property. The appraiser makes such certain adjustments up or down to the price per square foot to account for differences in the properties. After making the appropriate adjustments for conditions such as location, size, physical condition, and damages, and after adjusting the comparable prices for time and inflation, a final adjusted price is calculated. Since the determination of which comparables to use and which adjustments to make is largely one of judgment, the outcome may well turn on the credibility of the appraisers in the appeal.

The “income capitalization approach” is the preferred method for determining the taxable value of income-producing property. That method consists of techniques and mathematical procedures that an appraiser uses to analyze a property’s capacity to generate and to convert the income into a determination of present value. Under the income capitalization approach, net income is determined by subtracting estimated expenses (i.e. taxes, insurance, utilities, commissions, management fees) from gross economic income (an estimate of potential rental income less standard allowances for vacancies or rent losses). Net income is then capitalized based upon an appropriate rate of return and rounded up or down. The tax court need not accept the testimony of either appraiser on factual questions such as true value, the income being received by the taxpayer or the rate of return by which the income should be capitalized. Rather, the court is free to make its own determination. So long as the court’s decision is based upon facts in the record and not arbitrary, it will be affirmed on appeal.

There can be other grounds for a tax appeal. For example, a tax increase based upon an arbitrary spot assessment can be challenged. The Supreme Court has rejected tax reassessments based upon a “welcome stranger” policy of revaluing only homes that sold during the past year. Nevertheless, other grounds of arguably spot reassessments have been affirmed as reasonable. Actions of an assessor revaluing all apartments because of vacancy decontrol have been upheld, as were claims of an assessor that he revalued only one rental property because he discovered that there was much less wetlands than he had originally sought.

Resolution and Implications of a Tax Appeal

A tax appeal need not mean bitter litigation. Frequently, when the appraiser report for the taxpayer demonstrates a strong case, the matter is resolved by a settlement between the property owner and the municipality. There is a strong public policy towards settling litigation and enforcing settlements, including tax appeals. Policy favoring settlement of litigation and the enforcement of settlements is even more persuasive where the parties have settled on the record, thus invoking the interest of efficient dispute resolution, management of the court's calendars, and the integrity of the litigation process. Settlements before the Tax Court are typically considered binding contracts, once approval is obtained from the governing body. After approval for tax settlement is obtained from a governing body, the court will only vacate a settlement upon a showing of clear and convincing proof of fraud or other compelling circumstances.

Because of the Freeze Act, a municipality that loses a tax appeal cannot simply reimpose the same value on the property for the following year. Rather, the Freeze Act provides that a final judgment shall be conclusive and bind the tax assessor for the assessment year and the next two assessment years. The Legislature recognized that any other approach could result in harassment of the taxpayer, subjecting the taxpayer to the trouble and expense of repeated appeals. The Freeze Act does not apply only if the municipality establishes that there is a substantial change in the value of the property resulting from an internal or external change. For example, the grant of preliminary and final approval after the tax appeal raises a debatable question resulting in a hearing to determine if there has been a substantial increase in value resulting from the approval. Unlike an ordinary tax appeal, a claim by the municipality seeking relief under the Freeze Act imposes the burden of proof upon the municipality to prove a substantial increase resulting from an outside factor such as a site plan approval.

In summary, a tax appeal may not help improve the housing recession, but may be one means of partially mitigating the effects of the recession. Such action must be taken by April 1, 2008 or it will be necessary to wait until April 1, 2009.

Kenneth E. Meiser is a partner of the firm’s Land Use Division. He serves on the New Jersey Builders Association’s Legal Action Committee and is a Member of the Board of Directors of the Land Use Section of the New Jersey State Bar Association. His practice is concentrated in the areas of land use applications and litigation.