NOT FOR PUBLICATION WITHOUT APPROVAL OF THE TAX COURT COMMITTEE ON OPINIONS

TAX COURT OF NEW JERSEY

MALA SUNDAR **Richard J. Hughes Justice Complex** PRESIDING JUDGE **P.O. Box 975 Trenton, New Jersey 08625** 

**- 0975**  **609 815**

**- 2922, Ext. 54630 Fax 609 376** 

**- 3018** 

**1 June 17, 2021**  **Amber N. Heinze , Esq.**  **Irwin & Heinze, P.A. Attorney for Plaintiff** 

**s Kerry E. Higgins, Esq.**  **Mckenna, DuPont, Stone & Washburne, P.C. Michael R. Burns, Esq.**  **Marmero Law, LLC Attorneys**  **for Defendant 1** 

**Re: Spring**  **Terrace Apartments, L LC**  **v. Freehold Borough Block 43, Lot 2**  **Docket No. 001548-2017 Tower Spring Terrace, LLC v. Freehold Borough**  **Block 43, Lot 2 Docket No**  **s. 002029-2019; 003045-2020 Dear Counsel:**  **This opinion constitutes the court’s decision following trial of the above**

**- captioned matters.**  **Plaintiff s**  **2 own the above-captioned property (Subject), an**  **apartment complex on a 6.5-**  **acre lot in defendant taxing district (Borough)**  **, identified as Block**  **43 , Lot**  **2. The complex includes eight** 
**two**

**- story**  **garden style buildings with 55 rental**  **units in total**  **. T he**  **challenged assessments**  **3 were:**  **2017 2019**  **2020 Land**  **$1,210,000 $1,694,000**  **$2,117,500 Improvement**  **$3,775,200 $4,976,600**  **$5,127,500 Assessment**  **$4,985,200 $6,670,600**  **$7,245,000**

**1 Michael R. Burns, Esq., substituted in after the matter was tried, and submitte**  **d a post**

**- trial brief.**  **2 Plaintiff Spring Terrace Apart**  **ments owned the Subject during tax year 2017. Plaintiff Tower Spring Terrace LLC owns the Subject for tax years 2019 and 2020.**  **3 Tax year 2017 involved only the Borough’s counterclaim. Tax years 2019 and 2020 included**  **plaintiffs’ appeals and the Borough’s counterclaims. 2** 

**Each party’s real estate appraiser was offered**  **to, and accepted by**  **, the court as an expert in**  **real estate appraisal . Prior to trial, the**  **parties stipulated t**  **o the following: (1)**  **physical aspects of the Subject; (2) the highest and best use (HBU) of the Subject is its current use; (**  **3 ) the “appropriate**  **method of valuation is the income capitalization approach;” 4**  **(4 ) the Subject’s e**  **ffective g**  **ross income**  **(EGI) w**  **as $799,880**  **and $827,6 04**  **for each tax year 2019 and 2020; and (5) t he**  **t ax rates**  **for tax years 2017, 2019 and 2020 were**  **$2.712; $2.650; and $2.662 respectively** 

**. T**  **he remaining areas of dispute were: (1) the EGI for tax year 2017; (2) the appropriate provision for**  **operating**
**expen ses (should it be actual or estimated); (3) the appropriate provision for reser**  **ves; and (4) the appropriate**  **capitalization (Cap) rates. For the reasons set forth below, the court finds (1) the EGI for tax year 2017 is $7**  **69,2 00;**  **(2) use of actual operating expenses for insurance and utilities is appropriate for 2019 and 2020**  **tax years, and some of the other operating expenses are more appropriately estimated ; (**  **3 ) the**  **appropriate provision for reserves is 5%**  **of EGI for tax years**  **; and (4) the appropriate Cap r ates are**  **those used by the Borough’s appraiser, which with the stipulated tax rates provide an overall Ca p**  **rate (OAR) of 8.66%; 8.34%; and 8.20%. As a result, the court finds the Subject’s value**  **(rounded)**

**as $6,013,700**  **; $6,470,300**  **; and $6,706,500 for each tax year 2017, 2019 and 2020.** 
SUBJECT DESCRIPTION **The parties stipulated that the Subject**  **is a 6.5 -a**  **cre irregular**

**- shaped lot**  **and is improved by a circa** 

**- 1960s apartment complex consisting of**  **eight two** 

**- story buildings. There are a total of 55** 

**4 Under the income approach, and prior to the EGI stipulation, each appraiser’s value conclusi**  **on was**  **as follows: 2017**  **2019 2020** 

**Plaintiffs ’**  **Appraiser $4,560,000**  **$5,040,000 $5,330,000**  **Borough ’s Appraiser**  **$6,500,000 $7,100,000**  **$7,415,000 3** 

**Units (40 one-bedroom and 15**  **two -bedroom).**  **The Subject is in the R** 

**- 4**  **Residential/Apartment zone, and**  **in average condition. The building**  **s are garden** 

**- style with**  **brick exterior wall. One of the buildings is lo**  **cated along Spring Street at its intersection with Spring Terrace, while the other seve**  **n are located on Spring Terrace.**  **Spring Terrace is a two**

**- lane tertiary paper roadway with a dead end within the**  **Subject. The Subject is conveniently located with proximity to the Borough’s downtown and**  **public transportation. The**  **gross building area is 50,160 S**  **quare foot (SF) of**  **g ross**  **building a rea (G**  **B A)**  **with about 70 parking spots.**  **The one-**  **bed and one** 

**- bath units**  **measure 850**  **SF , and the**  **two**

**- bed and one** 

**- bath**  **units measure about**  **1050 SF**  **. E ach**  **unit has electric baseboard heating and two air**  **-conditioning (A/C)**  **units provided by the landlord** 

**. Tenants pay rent plus electric,**  **and remaining expenses are**  **borne by the landlord. Leases are on an annual basis.**  **The basement s are**  **unfinished. There is**  **a laundry room 5**  **in the basement of building Six,**  **which also contains an office area and tool room. The**  **Subject is maintained by a live** 

**- in**  **Superintendent who occupies a one** 

**- bedroom unit, and**  **was paid $16.4**  **0 per hour**  **, and a part** 

**- time**  **administrative employee who**  **maintained the leases and showed the units to prospective tenant**  **s. Plaintiffs’ representative testified that the part** 

**- time employee’s salary was allocat**  **ed to the Subject by a related entity.**  **Plaintiff Spring Terrace Apartments, LLC**  **(“Plaintiff 1”) owned the Subject until 2017. On December 15, 2017,**  **it sold**  **the Subject to plaintiff**  **Tower Spring Terrace, LLC ( “Plaintiff 2”**  **) for**  **$8,300,000 , through a**  **straw entity**

**. Plaintiff 1 provided financing of**  **$6,225,000 at**  **4% interest for** 

**5 The laundry room has**  **eight washing machines (charging $2 per wash) and**  **four dryers (charging**  **$1.50 per load). 4** 

**a 30-**  **year period, with a**  **10**

**- year balloon payment**  **, and secured**  **the loan by a nonrecourse mortgage**  **on the Subject. Plaintiff 2 then**  **sold another an older 48-unit**  **apartment comple x**  **located in Elizabeth (**  **“ Elizabeth Property**  **”) to an unrelated party**  **for $5,025,000 on April 4, 2018**

**. 6**  **Plaintiffs and their**  **appraiser call this a**  **“reverse” I.R.C. §1031 like**  **-kind exchange** 

**. Following**  **purchase of the Subject**  **, Plaintiff 2 made extensiv**  **e repairs (exterminators)**  **and renovations (**  **bathrooms and kitchens )**  **. It continues t**  **o make as**

**- needed**  **repairs and/or renovations (the latter only when units are vacated**  **). Plaintiffs are part of a**  **family of real estate entities whose business is real estate ownership**  **and management (the operating entity is a limited partnership, and all 150 partners therein a**  **re also partners in entities which manage real estate, mostly garden** 

**- style apartments similar to the Subject**  **and in similar markets)**

**. The family**  **to gether**  **own and manage 23 properties in New Jersey and New York, 21 of which are garden** 

**- style apartment complexes.**  **Parties agree that b oth plaintiffs**  **are experienced in apartment operations and management.**
HIGHEST AND BEST USE **“The highest and best use**  **analysis requires sequential consideration of the following four criteria, determining whether the use of the subject property is: 1) legally per**  **missible; 2) physically possible; 3) financially feasible; and 4) maximally productive.” Clemente v. T**  **ownship of South**  **Hackensack , 27 N.J. Tax 255, 268 (Tax 2013) (citation**  **s omitted),**  **aff’d , 28 N**  **.J. Tax 337 (App.**  **Div. 2015). “Actual use is a strong consideration” when analyzing the highest and best use (HBU) “of an improved property.” Ibid.**  **(citation omitted)**

**.**

**6 Neither the Subject’s purchase nor the Elizabeth Property’s sale was marke**  **d by the Borough’s assessor as non**  **-usable for purposes of Chapter 123. 5** 

**Both appraisers opined that the Subject’s**  **HBU is**  **its current us**  **e as improved.**  **Based on their respective analyses, the court agrees with their conclusion.** 
VALUATION **A complainant (or a counterclaimant) carries a dual burden of first overcoming a n**  **assessment’s presumptive correctness, and thereafter, of persuading the court of the correct valu**  **e of the property. MSGW Real Estate Fund, LLC v. Borough of Mountain Lakes, 18 N.J. Tax 364,**  **373, 377 -78**  **(Tax 1998); Ford Motor Co. v. Twp.**  **of Edison, 127 N.J. 290, 314**

**- 15 (1992),**  **aff’g ,**  **10 N.J. Tax 153 (Tax 1988). Th**  **e court can only determine the true v alue of the property based**  **upon “the evidence before it and the data that are properly at its disposal.” F.M.C. Stor es Co. v.**  **Borough of Morris Plains, 100 N.J. 418, 430 (1985). Both parties’ appraisers provided an opinion which was based on an accepted**  **valuation methodology for apartments. As such, their opinions rai**  **s e a debatable question whether the**  **imposed assessments are accurate. Therefore, the court finds that the parties have overcome the**  **initial presumptive correctness of the assessments (plai ntiffs**  **, for tax years 2019 and 2020, and the**  **Borough for tax year 2017). It will now examine the proffered evidence and whether it suf fices to**  **change the imposed assessments.**
APPRAISERS’ VALUE CONCLUSIONS **Both appraisers used the income**  **approach . Under this approach, an appraiser should**  **: ( 1)**  **determine the potential**  **gross income (PGI)**  **for the GBA; (2) reduce the same**  **by a market**

**- based**  **vacancy and collection loss provision, which will then provide the EGI; (3) deduct**  **from EGI certain operating expenses (excluding real property tax); and (4) capitalize the re**  **sulting net operating income by a**  **Cap rate** 

**. For a**  **tenanted property such as an apartment complex, the effective tax rate is added to the Cap rate.**  **See Jefferson House Invest** 

**. Co. v. Borough of** **6**

**Ch atham**  **, 4 N.J.**  **Tax 669, 677 (Tax**  **1982) (“[t]**  **he actual taxes assessed are reflected in the income**  **approach by including the effective tax rate” in the Cap rate). Both appraisers agreed that the Subject’s monthly rents were at market, that the**  **Subject was well** 

**- managed**  **, and that the tenant turnover was**  **relatively stable for the tax years at issue** 

**. As**  **noted above, parties stipulated to the EGI for tax years 2019 and 2020**  **(thus, there is no dispute as to the items comprising the EGI)** 

**. Post-**  **trial, parties clarified that the stipulated EGI included the “projected rental income for the Superintendent’s apartment.”**  (1) EGI for Tax Year 2017 **Plaintiffs’ appraiser c**  **laimed that there was no**  **information of rents in 2016 since the Subject wa**  **s purchased in 2017. Based on his conversations with plaintiffs and data from CoStar on rentals (in Monmouth County and ten properties in the Borough), he opined that rents increased**  **2% annually, thus, “applied**  **a 2% annual growth rate to back track to 201 6**  **market rental rates .”**  **He thus applied 4% his concluded EGI for tax year 2020 ($828,000) which provided him $794,880**  **as the Subject’s annual**  **gross rental. He reduced this by 4% vacancy/collection loss and**  **added $6,000 as other income**  **. He also deducted**  **$13,824 towards the Superintendent’s rent , estimated** 

**as a**  **4% deduction from the 2018 market rent. His concluded EGI was $755,261. The Borough’s appraiser concluded a slightly higher annual gross rental**  **of $795,000 . Th**  **e actual rents a**  **s of 10/1/2016 were**  **$1,150 for one -bedroom,**  **and $1,350 for two -bedroom,**  **which rents,**  **the Borough ’s appraiser testified, was**  **obtained as part of the owner’s Chapter 91 response to the Borough’s assessor**  **for that tax year**

**. He**  **also added $6,000 as other inco me and used**  **4% as**  **vacancy/collection loss for an EGI of $769,200. The court will accept the Borough’s appraiser’s**  **annual gross rent amount since it was based**  **on the actual amounts earned**  **. G enerally**  **, when income is imputed to a rent-free unit occupied by 7** 

**the superintendent or other employee, and is included in a property’s potential gross income, a commensurate deduction as salaries/wages is appropriate.**  **Parkway Village Apartments Co. v. Twp. of Cranford, 8 N.J. Tax**  **430, 446 ( concluding that it was proper to provide, as an operating**  **expense, “ an allowan**  **ce” for units occupied by the superintendent**  **s, “be cause the owner was**  **charged with the income to be achieved from these two units yet was not receiving the rent i n full**  **because the apartments constituted**  **additional compensation to the stated employees ”)**  **, rev’d on**  **other grounds, 108 N.J. 266 (1987) ;**  **Brunetti v. City of Clifton , 7 N.J. Tax 161, 17**  **6 (Tax 1984)**  **(finding “appropriate** 

**. . . the deduction for rentals of supervisor**  **’ s apartments, which**  **rents were included in gross rentals**  **”)**

**. Since the stipulated EGI for tax years 2019 and 2020 included**  **the im puted rental for**  **the live** 

**- in Superintendent’s unit**  **, the court**  **also will disregard plaintiffs’ appraiser’s deduction of the**  **same for tax year 2017**

**. 7**  **Thus, the court finds the EGI for tax year 2017 a s $769,200** 

**.** (2) Operating Expenses **The actual operating expenses of a well**

**- managed apartment complex should be**  **considered as representative of the market when they are “within normal**  **operating limits.” Parkway Village**  **Apartments Co., 8 N.J. Tax at**  **441-42. However, if “**  **expenses [are] . . . unusually high, an**  **adjustment must be made to fit the ‘well** 

**- managed’ standard**  **.” Equitable Life Assur. Soc. of U.S.** 
**v. T wp.**  **of Secaucus , 16 N.J. Tax 463, 467 (App. Div. 1996).**  **See also Brunetti**  **, 7 N.J. Tax at**  **176 (“**  **An appraiser**

**. . . is required to review, reanalyze and investigate where expenses on the surfac**  **e**

**7 For tax years 2019 and 2020, plaintiffs’ appraiser had deducted**  **$15,088 (about $1,258 per**  **month) and $18,431 (about $1,536 per month) as rent for the Superintendent’s unit. These were**  **amounts reported on the I&E statements as “Administrative Rent” and deduct ed in computing the**  **Subject’s “Rental Income.” The rent rolls as of September 2018 and 2019 showed “Admin rent” as $1,200 and $1,240 respectively. Plaintiffs’ appraiser noted that the Superintendent was “le**  **t go in**  **2018 ” thus, the**  **difference in the “admin” rent “represents partial rent while he was employed.**  **” 8** 

**appear unreasonable ”).**  **It is undisputed tha t the Subject is a well** 

**- managed property.**  **Th erefore,**  **its reported expenses are deemed reasonable unless established otherwise.**  **Plaintiffs’ appraiser**  **determined the operating expenses in the amounts reported, and as**  **categorized in Plaintiff 2’s I&E statements for tax years 2019 and 2020 (with the line items**  **comprising each category) as reasonable and at market,**  **except for extermination fees for 2019 which he stabilized** 

**. The categories**  **on the I&E statements were administrative ,**  **management fees ,**  **advertising, salaries & benefits**  **, property mainten**  **ance ,**  **insurance ,**  **and utilities. The expenses**  **totaled $265,645**  **or $4,830 per unit (tax year 2019) and 275,783**  **or $5,014 per unit (tax year 2020),**  **which was 33% of each tax year’s EGI. For tax year 2017, t**  **he appraiser estimated the operating**  **expenses at $2 64,341 which was 35% of the EGI he had computed for that tax**  **year. T**  **he Borough’s appraiser’s categorized the**  **expense s as**  **insurance, utilities, repairs and maintenance (R&M), and management/administration/salaries.**  **H e estimated**  **i nsurance and utilit**  **y**
**expe nses**  **at a per**

**- unit or per SF (PSF) basis, and a**  **s a percentage of EGI for**  **remaining two categories**  **. The total operating expenses was $206,326; $200,481; and $210,279. 8**  (i) Insurance and Utilities **The court accepts the actual (reported) expenses for insurance**  **and utilities on Plaintiff 2’s** 
**I&E statements a s**  **reasonable for tax years 2019 and 2020.**  **That the actual**  **utilities expenses are lesser than the Borough’s**  **appraiser’s estimate or the data from Institute of Real Esta**  **te Management (IREM) for garden type buildings in Southern New Jersey do not render them**  **incredible since “ a prospective purchaser would want to know the actual expenses in order to**  **formulate his own standardization where particular expenses in a given year appe ar to be other** 

**8 Because the parties stipulated to t**  **he EGI for 2019 and 2020, the operating expenses which were computed as a percentage of EGI changed from that contained in his report, as did the total** 

**. 9** 

**than ordinary. ”**  **Brunetti , 7 N.J. Tax**  **at 17**  **6. For tax year 2017, the court accepts the Borough’s appraiser’s**  **estimate s**  **for these expenses since there was no breakdown from plaintiffs’ appraiser.**  (ii) R&M – Property Maintenance **Th e costs reported on Plaintiff 2’s**  **I&E statements , as**  **a percentage of the stipulated EGI for 2019 and 2020**  **, is**  **9.8% and 6.5%. The Borough’s appraiser’s estimate would be 9% of his EGI for tax year 2017; and 8.95% and 8.5% of the stipulated EGI for**  **tax year s**  **2019 and 2020. 9**  **The IREM data for Maintenance (which included security, grounds maintenance, maintenance repairs, and painting/decorating) for “garden type buildings” in Southern Ne**  **w Jersey shows the ratio of this expense to “gross possible income” (which includes rental and ot**  **her income, less vacancy and collection loss, thus is the EGI) of 9.1% (2016 data); 7% (2018 data); and 6.3%**  **(2019 data). This data is more persuasive than the “Income/Expense Analysis: C onventional**  **Apartment” data att ached to the Borough’s appraiser’s report, which is on a nation** 

**- wide basis,**  **which reported R&M costs were low for garden**

**- style apartments at a median of $0.45 PSF of**  **rentable area in 2016; $0.45 PSF in 2017; and $0.53 PSF in 2018. Note that this data sour ce also**  **showed that the among operating expenses, “maintenance expenses” were $0.90 PSF and $0.93 PSF or 6% to 7.5% of EGI (there was no indication of what comprised maintenance expenses).**  **Based on the evidence before it, the court concludes**  **that a stabilized allowance of 9% of the EGI**  **for the tax years at issue is appropriate especially since the parties agree that the Subject**  **is well**

**- managed and well** 

**- maintained.**  **T he**  **result ing expense**  **is $69,228**  **(tax year 2017); $71,989**  **(tax year 2019); and $74,484 (t ax**  **year 2020).**

**9 The Borough’s appraiser used an estimate of 7% of EGI, to which he added $15,600**  **for “additional cost**  **and lease up time to attract new tenants.” His final figure for tax year**  **2017 is**  **$69,444 ; and for tax years 2019 and 2020, using the**  **stipulated EGI ,**  **is $71,592 and $73,532**  **respectively**

**. 10** 

( ii i) Management/Administrative/Salaries/Miscellaneous **Under “administrative”**  **category, Plaintiff 2’s I&E statements show several items such as**  **various repairs, painting, licenses, permits, legal or professional fees, office expenses,**  **computer**
**expenses , landscaping, snow removal, security, and supplies**  **. Management fees were separately**  **categorized and was paid for offsite services (rent collection,**  **financial activities, office functions, repairs or renovations)**  **to a related entity (an “umbrella partnership”)**  **, Tower Management**  **, LLC**

**. Advertising**  **category included tenant placement**  **, referral fees**  **, and promotions.**  **S alaries**  **and benefits category included office salaries**  **, maintenance salaries**  **, commissions**  **, employee benefits, payroll taxes**  **, w orker’s compensation insurance. For tax years 2019 and 2020, the**  **ratio of each**
**expense to the stipulated EGI i**  **s: 2019**  **2020 Administrative**  **$16,962 (2.1% of stipulated EGI) $23,643 (2.8% of stipulated EGI)**  **Management Fees $29,991(3.75% of**  **stipulated EGI) $31,618 (3.82% of stipulated EGI)**  **Advertising $1,892 (0.2% of stipulated EGI)**  **$3,552 (0.4% of stipulated EGI) Salaries & Benefits**  **10 $63,067 (7.9% of stipulated EGI)**  **$73,905 (8.9% of stipulated EGI) Total**  **$111,912 (14% of stipulated EGI)**  **$132,718 (16% of stipulated EGI) The Borough’s**  **appraiser deemed 5% of EGI as the appropriate rate for “management and**  **administration fee” since it was typical for the Subject’s size and type. He provi ded 2% for**  **additional miscellaneous**  **costs such as “ payroll taxes, legal, accounting,**  **supplies etc.” He noted**  **that the salaries/benefits package appeared**  **excessive when compared to IREM data, and that his**  **2% allowance was for any payments to the Superintendent apart from the re nt-**  **free unit , that the**  **Superintendent performs certain repairs in exchange for the rent**

**- free accommodation, and that** 

**10 Office salaries were $11,159 for tax year 2019 and $14,435 for tax**  **year 2020. Maintenance salaries were $35,856**  **for tax year 2019 and $38,489 for tax year 2020. Commissions were $ 2,425**  **and $2,238, and benefits were $7,891 and $7,991 for each tax year 2019 and 2020. 11** 

**lack of a rent**

**- free unit would result in an increased salary allowance. He also**  **stated that there are**  **no commissions for apartment rentals. The**  **IREM data fee for “garden type buildings” in Southern New Jersey had a category for**  **“Subtotal Administrative” which comprised of management fee and “other adminis trative.” It is**  **unknown what is comprised in the latter. The median (ratio of expense to “gross possible income”**  **which included provision for vacancy and collection loss, thus, effectively, EGI) was as follows:** 
**2016 data 2018 data**  **2019 data Management Fee**  **4.2% 3.5%**  **2.8% Other Administrative**  **5.5% 5.8%**  **5.4% Subtotal**  **Administrative 7.7%**  **7.9% 7.7%**  **Management fees normally reflect time remuneration for time spent on “ accounting, rent**  **collection, advertising and supervision relative to the operation of a rental property, whether**  **performed by an owner or a professional management firm .”**  **Murnick v. City of Asbury Park, 2 N.J. Tax 168, 183**  **(1981) (citation omitted)**  **, rev**  **’ d on other grounds**  **, 187 N.J. Super. 455 (App.**  **Div. 1982)**  **. This is an expense item independent of salaries “ actually paid to employees necess**  **ary to maintain the property and provide the operational activities necessary to keep a mult**  **itenanted apartment**  **. . . physically, functionally, and economically competitive .”**  **Ibid. (citation omitted).** 
**Here , the management fee is paid to a related**  **entity and is for activities which are also**  **claimed as being performed by the part**

**- time employee** 

**. Further**  **, the salaries paid to this employee**  **was an administrative allocation by the “umbrella” partnership amongst various rel ated entities**  **including plaintiffs, per plaintiffs’ representative’s testimony, thus, raises the question of it being**  **a reasonable, actual expense. Also, o ffice expenses claimed under “administrative” also appears**  **duplicative since it would be subsumed in the management fee. The Borou**  **gh’s appraiser’s testimony as to commissions was also credible, and since there was no information as**  **to the nature and necessity for this item as a landlord expense.** **12**

**Considering all these facts, the court finds that office salaries should be removed f rom**  **salaries and benefits, as should commissions. Further, due to the duplication of item s in**  **“administrative” and management fee, a stabilized**  **provision of 3%**  **of EGI is appropriate**  **for management/administrative/miscellaneous fees for each tax year. This amo**  **unts to $23,076 ( tax** 
**year 2017); $23,996 (**  **tax year 2019); and**  **$24,828 ( tax year**  **2020). The court**  **accepts the** remainder **of the reported amounts for salaries/benefit**  **s tax years**  **2019 and 2020**

**. While it is unclear whether a portion of the “benefits” are attributable to t**  **he part**

  ** time employee whose salary is allocated administratively, there is no informati** **on to support a quantified reduction of this item. There is no information on the amounts**  **expensed for salaries and**  **benefits for t ax year 2017. The court will use 6% of EGI in this regard based on the s**  **alaries and benefits**  **(n ot including office salaries and commissions) for tax year 2019 and 2020 ($49,483**  **and $57,232 ) which as a percentage of**  **the stipulated EGI**  **is 6. 1**  **% and 6.9% (for tax year 2020, th e**  **salary i ncrease was due to a new Superintendent**  **). At**  **6 % of EGI,**  **salary/benefit expense for tax year 2017**  **will be $46,152.**  (iv) Reserves **The appraisers differed significantly in this aspect**

**. P**  **laintiffs’ appraiser ’s total for reserves**  **for short**

**- li**  **ved items was $32,903**  **for each tax year , which as a ratio of EGI is about 4.3%, 4.1%,**  **and 3.9 % per tax year** 

**. He provided 5% of EGI for long** 

**- life (structural) items. T**  **ogether, they totaled**  **$71,363, $72,897, and $74,283**  **(using the court decided EGI for 2017 and stipulated EGI for 2019 and 2020 tax years)**  **. As a percentage of the EGI,**  **this is**  **9.28%, 9.11%, and 8.9**  **6% , and** 

**o n a per**  **-unit basis, it is $1,298, $1,325, and $1,350 per tax year. 13** 

**The Borough’ s appraiser allow**  **ed 1.5% of the EGI**  **f or**  **reserves, or $11,538; $11,998 and**  **$12,414 respectively**  **(using the stipulated EGI for 2019 and 2020 tax years)**

**. On a per** 

**- unit basis**  **this is $210; $218; and $226 per**  **tax year. Plaintiffs’ appraiser**  **’s reserves**  **f or**  **short- lived items were as follows:**  **kitchen replacement**  **(plus cabinets/counter**  **s /appliances**  **) and bathroom replacement (including fixtures) were $**  **14,641 and $**  **10,318 respectively for each tax year.**  **11 For**  **hot water heaters, he used the cost estima te**  **of $500**  **provided by the plaintiffs’ ownership, which was lower than the adjusted**  **cost from M&S**  **($944), and he used an average life of five years for reserves of $ 5,500**  **each tax year. Cost of**  **one A/C unit**  **was estimated at $200**  **(based on “local sources” and experience). With an estimated**  **9-**
**year life**  **, reserves**  **were $2,444**  **each tax year (**  **$200 × 110 units since each unit had two A/C units** 

**÷ 9 years).**  **For long -lived**  **structural items (furnaces, roof, exterior roof, doors, and windows), he noted that his**  **estimate was conservative. 12**  **A spread sheet**  **in his report showed several items**  **as to which replacements were effectuated by plaintiffs, with the**  **dates when the work was done in 2018/2019, and the apartment number to which it was done (but no costs were in**  **cluded)**

**.**

**11 The**  **M arshall**  **& S wift (M&S)**  **data for “low cost” kitchen replacement (which included appliances, cabinets, countertops) was**  **of $3,375 . The appraiser adjusted this for cost and location**  **by 1.02 and 1.16 respectively**  **for a final cost of $3,993**  **. This he multiplied by 55 units, then div**  **ided the product by a kitchen’s average life of 15 years. The appraiser noted that plaintiffs’ ownership indicated that average costs for a new kitchen was about $5,000.**  **The M&S data for “low cost plumbing fixture” was $78**  **5. As adjusted for cost and location**  **(1.03 and 1.16), a three**

**- fixture bathroom cost**  **$2,814 . $2,814 x 55 ÷ 15 years**  **estimated life =**  **$10,318 for reserves for each tax year** 

**. The appraiser noted that plaintiffs’ ownership indicated**  **that average costs for a new kitchen was about $3,000. 12**  **Plaintiffs ’**  **appraiser noted that t he actual**  **capital expenditures in 2018**  **included concrete work**  **($34,000); drainage work ($30,000); fencing ($8,235); paving ($82,750); exterior lighting ($16,000); retaining wall ($59,260);**  **tree work ($10,000). R oof re**  **placement in 2020,**  **on two**  **building s cost**  **$250,000 , and the other six buildings required roof replacement at an estimated cost**  **of $750,000. He noted that the total of these capital expenditures based on a 20**

**- year life would**  **require $62,000 annual reserves, which was 160 times his 5% provision. This ratio is unclear**  **since he provided $37,000 to $41,000**  **as reserves for structural items for each tax year. 14** 

**The Borough’s appraiser ’s allowance w**  **as for**  **future replacement of structural, mechanical, or utility items (roof, furnace, hot water heater, windows). He opined that**  **no one replaces kitchen**  **s or bathrooms annually, and that their**  **repairs/re novatio**  **ns would be categorized as repairs and**  **maintenance for valuation purposes even if capitalized for accounting purposes. This is because,**  **he testified, a landlord will prefer to make repairs as opposed to wholesale rep lacement annually**  **and thus maximize inc ome.**  **Reserves for replacement “provides for the periodic replacement of building com ponents**  **that wear out more rapidly than the building itself and must be replaced during the building’s economic life.” Appraisal Institute,**  **The A ppraisal of Real**  **Estate , 485 (14**  **th ed. 2013).**  **While t he**  **items comprising the reserves “is a matter of appraisal judgment based on mar ket evidence**  **,” the “magnitude and coverage of the replacement allowance is based on the annual [R&M**  **] expenses**  **of the property for the speci fic components considered in the allowance.”**  **Id. at 486.**  **The court finds the Borough’s appraiser’s provision unduly low. Plaintiff 2’s I&E**  **statements for 2019 and 2020 tax years show that the repairs to several components of t he units**  **and the Subject, including roof and boiler, and supplies for the repairs, total to**  **about $30,000 (2019 tax year) and $20,000 (2020 tax year), which is about 3.75% and 2.4% of each tax year’s EGI** 

**. Plaintiffs’ appraiser’s provision for short** 

**- lived items at $32,903 as a ratio**  **of EGI averages about**  **4%. While the Borough’s appraiser is reasonable in noting that no one replaces kitchens or**  **bathrooms every year, here, plaintiff’s appraiser deemed their average estimat ed life as 15 years**  **(which estimate was unchallenged), thus, replacement costs were sprea d over a 15**  **-year period. Taking the amount spent on repairs into consideration and factoring in the Subject’s chronologi**  **cal age (40** 

**- 50 years), the**  **court finds appropriate, a**  **stabilized allowance**  **5 % of EGI**  **or $38,460;**  **$39,995; $41,380 for each respective tax year. 15** 

(3) Cap Rates **The appraisers differed by less than a percent in their cap rates, thus in their OAR (**  **cap rate plus the stipulated tax rates**  **) . Plaintiffs’ appraiser’s concluded cap rates were 6.5% (tax years 2017**  **and 2019) and 6.25% (tax year 2020). The Borough’s appraiser concluded a cap rate of 5.95%;**  **5.69%; and 5.54% for each respective tax year at issue** 

**. Plaintiffs’ appraiser**  **’s cap rates were based on a reconciled approach. He used cap rates**  **from third quarter data issued by the American**  **Council of Life Insurance (ACLI)**  **(for both property type, and geographically**  **, MidAtlantic region )**  **, and “equalization**  **” cap rates from**  **Korpacz Real Estate Investor Survey**  **(PWC) (**  **for institutional and**  **non- institutional grade property**  **) . He**  **also computed cap rates using**  **the band of investment (BOI) method. For tax year 2017, the ACLI and PWC cap rates ranged from 4.73% to 6.72%** 

**. Under the BOI method,**  **he assumed a mortgage of 58%, interest rate of 3.68%, and**  **it appears that he assumed a 5.99% equ**  **ity rate of return . This**  **provided a cap rate**  **of 6.61%. He concluded a cap rate of 6.5%.**
**For tax year**  **201 9, the ACLI and PWC cap rates ranged from 4.40% to 6.54%. Under the**  **BOI method, he assumed a mortgage of 58%, interest rate of 4.43%, and**  **it appear s that he assumed** 

**a 5.97% equity rate of return. This provided**  **for a cap rate of 6.88%. He concluded a cap rate of**  **6.5%.**
**For tax year**  **20 20, the ACLI and PWC cap rates ranged from 4.76% to 5.10%. Under the**  **BOI method, he assumed a mortgage of 60%, interest rate of 3.78%,**  **and it appears that he assumed**

**a 5.1% equity rate of return. This provided**  **a cap rate of 6.31%. He concluded 6.25%.**  **The Borough’s appraiser used only the BOI method, and estimated mortgage (LTV) and equity rates of return**  **based on conversations with multiple banks, investors, and on his own 16** 

**investment properties**

**. For tax year 2017, he**  **assumed the availability of a 70% mortgage for a**  **twenty**

**- year period at a 4.5% interest rate**  **, and 5% equity dividend return for a**  **cap rate of 5.95%. For tax year 2019, he**  **assumed the availability of a 70% mortgage for a twenty**

**- year period**  **at a 4.25% interest rate, and 4.5% equity return rate for a cap rate of 5.69%. For tax year 2020, he**  **assumed the availability of a 70% mortgage for a twenty**

**- year period**  **at a 4.25% interest rate, and 4% equity return rate for a cap rate of 5.54%. The court finds**  **the Borough’s expert’s BOI**

**- based cap rate conclusions**  **more persuasive. The expert**  **confirmed with bankers as to the mortgage terms and interest rates for the market . His**  **substantiation for a lower equity dividend**  **return rate is reasonable. The Subject is a sound investment property, with strong income potential and desirability given i**  **ts excellent location, and its high occupancy. These facts make it a lesser investment risk, and therefore, does not**  **warrant very high rates of return. Although national, the ACLI survey covers debt** 

**- equity transactions, and**  **thus, is more properly applicab le as a check on the results from a BOI analysis.**  **Since the Subject is an apartment complex, the Cap rate should be loaded by the effecti ve** 
**tax rate. Prior to the commencement of the trial, the court directed the parties to discuss th**  **e tax rates due to**  **the then pending litigation (in another matter) as to the applicability of Chapter 123 to value conclusions in appeals involving real properties in Monmouth County (because, per the**  **taxing district**  **, each year’s assessment is a district**

**- wide reassessment, therefore, excepted from the**  **relief under Chapter 123). Parties then provided the court a stipulation of tax rates for each tax**  **year. These rates are the general tax rates, not the effective tax rates. 13**  **Therefore, the court finds plaintiffs have waived**  **any right to**  **the use of the effective tax rate, and by implication, the relief if**  **any, afforded by application of Chapter 123.**

**13 See**  **https://www.state.nj.us/treasury/taxation/lpt/taxrate. s**  **html (last visited June 17, 2021).** **17**

**As noted above, the stipulated tax rates were $2.712; $2.650; and $2.662 for each tax year 2017, 2019 and 2020 respectively. Therefore, the court finds the**  **OAR as 8.66**  **%; 8.34%; and**
**8.20 %.** 
COURT’S VALUE CONCLUSIONS
Tax Year 2017
**EGI $769,200**  **Less: Operating Expenses** 

**Insurance $22,000 Utilities**  **$49,500 R&M (9% of EGI)**  **$69,228 Management/Admin./Misc. (3% of EGI) $23,076**  **Salaries (6% of EGI)**  **$46,152 Subtotal $209,956**  **Reserve s (5% of EGI)**  **$ 38,460 Total**  **$248,416 Net Operating Income $520,784** 
**OAR at 8.66%**  **Value $6,013,672**  **Rounded to $6,013,700 In connection with the above value conclusion, the court addresses the Subject’s 2017**  **purchase by Plaintiff 2. The Borough claims the sale was exposed to the market by a third** 

**- party**  **realtor and sold at an arms**

**- length pri**  **ce. Plaintiffs’ officer and their appraiser**  **argued that t he**  **transactions were undertaken to save federal capital gains tax of about $1,414,500, which savings were used towards the purchase price of the Subject, therefore, the Subject’s purcha**  **se price is**
**i nflated by that amount, and the loan** 

**- to** 

**- value ratio exceeds**  **90% ($6,225,000 non**

**- recourse loan**  **versus $6,885,500, the alleged actual sale price**  **), which is evidence**  **of the non-**  **arms -length nature**  **of the Subject’s purchase. Depending on the facts, an alleged I.R.C. §**  **1031 exchange sale may be deemed a credible value indicator (as a comparable or as a subject sale). See e.g.**  **Aetna Life Ins. Co. v. Montgomery 18** 

**County Bd. of Assessment Appeals, 113 A.3d 267, 283 (Pa**

**. Cm**  **mw. Ct** 

**. 2015) (“a 1031 Exchange,** 

**a sa le** 

**- leaseback agreement, and an option** 

**- to** 

**- purchase agreement**  **- are competent comparables as**  **a matter of law and may be used to determine the Property ’**  **s market value, so long as these sales are found to be**  **‘ bona fide**  **’ or ‘ fair.**  **’”); Inland Edinburgh Festival,**  **LLC v. Cty. of Hennepin ,**  **938 N.W.2d 821, 827**  **-828 (Minn. 2020) (property sold as an I.R.C. §1031 exchange “may not**  **represent the property**  **’ s fair market value because when business or investment property owners conduct**  **a section 1031 exchange, any property that is of the same nature or character may be traded, even**  **if the properties differ in grade or quality” however, “[i]t may well be that the sale price from** 

**a section 1031**  **property exchange is indicative of the market value for the property at issue ”)**  **(ci tations omitted)** 

**. Here, while the court is skeptical of plaintiffs’ appraiser’s opinion that t**  **he tax savings on the deferral of the gain/loss was used to purchase the Subject, it need not decide whet**  **her the Subject 2017 sale is a credible value indicator.**  **The Borough’s appraiser did not rely on the Subject’s sale. Rather, he developed a value under the income approach, which approach the**  **court finds appropriate. Therefore, analyzing whether the 2017 Subject’s sale was a non** 

**- arms**  **-length**
**“reverse” I.R.C. §1031 transaction is academic.** 
Tax Year 2019
**EGI $799,880**  **Less: Operating Expenses** 

**Insurance $24,087 Utilities**  **$50,704 R&M**  **(9% of EGI) $71,989**  **Management/Admin./Misc. (3% of EGI)**  **$23,996 Salaries**  **$49,483 Subt**  **otal $220,260**  **Reserves (5% of EGI)**  **$ 39,995 Total**  **$260,254 Net Operating Income $539,626** **19**

**OAR at 8.34%**  **Value $6,470,335**  **Rounded to $6,470,300**

Tax Year 2020
**EGI $827,604**  **Less: Operating Expenses** 

**Insurance $28,273 Utilities**  **$51,471 R&M**  **(9% of EGI) $74,484**  **Management/Admin./Misc. (3% of EGI)**  **$24,828 Salaries**  **$57,232 Subt**  **otal $236,288**  **Less: Reserves**  **(5% of EGI) $ 41,380**  **Total $277,669**  **Net Operating Income $549,935**
**OAR at 8.20%**  **Value $6,706,524**  **Rounded to $6,706,500 14**  CONCLUSION **The court will enter judgments revising the assessments for tax year 2017, 2019 and 2020 in accordance with this opinion.**  **/s/ Mala Sundar Hon. Mala Sundar,**  **P. J.T.C.** 

**14 For**  **tax year 2020, plaintiffs’ appraiser deducted $50,000 from his ultimate value conclusion, this being the amount allegedly expended by the landlord to gut and waterproof unit 55 in 2019** 

**. The court disagrees. As with his stabilization of the 2019 extraordinary expenses for exte**  **rminator, he should also have stabilized this expense item.**