TAX COURT OF NEW JERSEY

J OSHUA D. N OVIN **Dr. Martin Luther King, Jr. Justice Building** J udge **495 Dr. Martin Luther King, Jr. Blvd., 4 th**  **Floor Newark, New Jersey 07102**  **Tel: (609) 815** 

**- 2922, Ext. 54680** 

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE TAX COURT COMMITTEE ON OPINIONS

**1 January 19, 2023**  **Lee S. Holtzman, Esq. Farhan Ali, Esq.**  **McCarter & English, LLP Four Gateway Center**  **100 Mulberry Street Newark, New Jersey 07102**  **Richard P. DeAngelis, Esq. Connell Foley, LLP**  **56 Roseland Avenue Roseland, New Jersey 07068** 
**Re: OTR** 

**- MCC**  **, LLC**  **v. Parsippany-Troy Hills Township Docket Nos. 001742-2009, 001149-2010, 001289-2011, 004558-2012,**  **000871-2013, 003789-2014, and 003704-2015 and**  **Brookwood MC INV. I & I I**  **% CBRE v. Parsippany-Troy Hills Township**

**Docket No s. 004516-2016, 001685-2017, 001124-2018, and 002857-2019** 
**Dear Mr. Holtzman**  **, Mr. Ali**  **, and Mr. DeAngelis**  **: This letter**  **shall constitute the court’s opinion following trial of**  **the local property tax**  **appeals instituted**  **by plaintiff**  **s, OTR** 

**- MCC**  **, LLC**  **(“OTR**

**- MCC”)**  **and Brookwood MC INV. I & II** 
**% CBRE (“Brookwood”) (**  **OTR**

**- MCC and Brookwood shall be**  **collectively referred to herein as** 

**“ OTR** 

**- MCC**  **/Brookwood ”)** 

**. OTR** 

**- MCC**  **/Brookwood challenge**  **the 2009, 2010, 2011, 2012 ,**  **2013,**
**2014 , 2015, 2016, 2017, 2018, and 2019**  **tax year assessments on their**  **improved property located in Parsippany-**  **Tr oy Hills Township**  **(“ Parsippany**  **”)**

**. For the reasons stated more fully below, the court**  **affirms t he 2009,**  **2010, 2013, 2014, 2015, 2016, 2017, 2018, and 2019**  **tax year assessments and reduces the 2011**  **and 201 2**  **tax year OTR**  **-MCC, LLC v. Parsippany-Troy Hills Township and**

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **2**
**assessments**

**.** I. Procedural History and Findings of Fact
**Pursuant to R.**  **1:7- 4, the court makes the following findings of fact and conclusions of law**  **based on the evidence and testimony adduced durin g trial.**  **1 As of the valuation dates,**  **OTR -MCC/Brookwood**  **was the owner of the real property and improvements located at**  **300 Interpace Parkway and**  **1 Upper Pond Road, Parsippany**

**- Troy Hills**  **Township, Morris County, New Jersey (the “subject property”).**  **The subject property is identified**

**on the**  **Parsippany- Tr**  **o y Hills**  **municipal tax map as Block 136**  **, Lot 43.4.**  **The subject property contains approximately 2,028 feet of frontage along Interpace Parkway and 1,124 feet of f**  **rontage along Upper Pond R**  **oad. The subject property is located near the intersection of Interpace Parkway**  **and Cherry Hill Road**  **, with nearby access to**  **Routes 80, 46, 202, and 287. The subject property**  **is more commonly known as**  **Morris Corporate Center I (“MCC I”**  **) and**  **Morris Corporate Center II (**  **“MCC II”)**

**. 2**  **MCC I and MCC II are**  **two detached Class A,**  **multi**

  ** tenanted** **office buildings o**  **n the Morris Corporate Center campus**  **, containing a total of**  **approximately 529,362 square feet of leasable**  **area**
**. MCC I and MCC II**  **each comprise three (3)** 

**1 Trial was commenced before Hon. Vito Bianco, J.T.C. However, following the second day of**  **trial, Judge Bianco determined**  **that he would be unable to conclude trial and render**  **an opinion in the above matters**  **and the y**  **were reassigned to the undersigned. With the consent of all counsel,**  **the court reviewed the exhibits marked for identification and**  **listened to the testimony elicited during the first two days of trial on the court’s audio recording system and**  **reviewed the tra**  **nscripts. 2**  **Prior to the commencement of trial, OTR**

**- MCC/Brookwood and Parsippany**  **executed a Joint**  **Stipulation of Fact. The Joint Stipulation set forth: (i) the subject property**  **’s address as 300**  **Interpace Parkway and 1 Upper Pond Road; (ii) the subject property comprises two detache d Class**  **A office buildings constructed in 1986; (iii) the highest and best use of the subject propert y is its**  **continued use as Class A office s**  **pace ; (iv**  **) the subject property comprises 529,362 square feet of leasable**  **area; (v) the subject property’s total tax assessment during each year under appeal is**  **$57,660,700; (vi) that OTR** 

**- MCC/Brookwood’s proposed expert and Parsippany’s proposed**  **expert are qualified as valuation experts; and (vii) the effective tax rates for each y ear under appeal.** **OTR -MCC, LLC v. Parsippany-Troy Hills Township and** 

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **3 attached office buildings, referred to as pods. MCC I contains pods A, B, and C, while MCC II**  **contains pods D, E, and F. Pods A, C, D, and F are three -story**  **office buildings constructed over** 

**a one -**  **story parking garage. Pods B and E are four** 

**- story**  **office buildings. The subject property**  **contains a total of 1,597 parking spaces, 1,352 are surface parking and 245 are covered parking**  **(below the pod buildings).**  **MCC I and MCC II were constructed in 1986 of st**  **eel frame and masonry/**  **granite panel walls, intermixed with bands of**  **reflective insulated**  **glass windows.** 3 **The buildings**  **are situated on an irregular**  **ly shaped 30.83-**  **acre site.**  **MCC I and MCC II feature amenities including**  **renovated multi** 

**- story atrium**  **lobbies with**  **skylight ceilings ,**  **granite tile floors, marble and wood panel covered walls, eight passenger elevators,**  **a shared conference center, a three**

**- hole putting green, a one and a half mile**  **jogging/walking trail, and**  **an outdoor seating area.**  **MCC I and MCC I**  **I are fully sprinklered. MC**  **C I and MCC II are surrounded by**  **grassy areas ,**  **decorative trees ,**  **and shrubs**

**. A**  **n oversized retention**  **pond featuring fountains and a waterfall element is located between MCC I and MCC II** 

**. E**  **ach floor**  **feature s**  **men ’s and women’s restroom**  **s (renovated in 2005), finished with granite**  **countertops and backsp**  **lashes ,**  **and granite/marble tile flooring . In addition,**  **MCC I and MCC II e ach contain**  **a cafeteria offering**  **on- site catering and a private**  **dining/conference room**

**. There is also a fitness**  **facility located on** 

**- site** 

**. Tenants have access to dry cleaning and shoe** 

**- shine services, an ATM,**  **and car wash services. MCC I and MCC II also feature an on** 

**- site security guard, closed circuit**  **television moni tors, and a key card access system.**  **MCC I and MCC II are each serviced by loading areas with direct access to**  **four freight elevators.**

**3 According to OTR** 

**- MCC/Brookwood’s expert**  **(as such term is defined herein), the subject property was developed in the 1980’s by SJP Properties and Prudential and was sold in December**  **1999 to OTR-MCC (the State Teachers Retirement System of Ohio), for $95,000,000. OTR**  **-MCC, LLC v. Parsippany-Troy Hills Township and**

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **4 The**  **buildings’ interior common hallways and**  **tenant offices are generally finished with**  **acoustic tile ceilings, painted and vinyl covered drywall, recessed lighting, and**  **wood composite flooring**  **or carpet**  **ing. Ceramic tile flooring is installed in tenant kitchen areas and tenant**  **bathrooms. Each pod floor is serviced by its own central heating and air conditioning**  **unit, located on the buildings’ roof.**  **The subject property is in Pa rsippany-**  **Troy Hills Specialized Economic Development area**  **, SED**  **-5, with permitted uses includ**  **ing: offices for executive or**  **administrative purposes , scientific**  **or research laboratories, fabrication and assembly of products ,**  **processing and warehousing facilities for finished products, agricultural uses, and mobile food vendor establi**  **shments. 4**  **Thus, use and operation of the sub**  **ject property as a Class A,**  **multi**

**- tenanted**  **office building , i**  **s a legal ly**  **permitted and** 

**conforming us e.**  **Conflicting testimony was offered regarding the subject property’s Flood Hazar d Zone**  **designation. According**  **to OTR** 

**- MCC/Brookwood’s expert (as**  **such term is defined herein),**  **the subject**  **property is in Flood**  **Zone “ C**  **” or an**  **“ area**  **[] of minimal flood**  **hazard.” 5**  **H owever,**  **according to Parsippany’s**  **expert (as such term is**  **defined herein), the subject property is**  **located in Special Flood Hazard Area**  **“X” or a “[m]oderate flood hazard area[].”**  **6**
**OTR**

**- MCC**  **/Brookwood timely filed**  **direct appeal c**  **omplaints with the Tax Court**  **challenging the subject property’s 2009,**  **2010, 2011, 2012, 2013, 2014**  **, 2015, 2016, 2017, 2018, and 2019**  **tax year assessments**

**. Parsippany filed counterclaims for the**  **2009, 2010, 2011, 2012,**

**4 OTR** 

**- MCC/Brookwood’s expert’s (as**  **such term is defined herein) appraisal report**  **s also**  **identif ied**  **digital storage warehouse as a permitted use in the SED -5 z**  **oning district. 5**  **https://www.fema.gov/glossary/flood- zones** 
**. 6**  **The subject property’s location in either Flood Zone “C” or Special Flood Hazard Area “ X” does**  **not impact the court’s determination of the subject property’s true**  **value. OTR**  **-MCC, LLC v. Parsippany-Troy Hills Township and**

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **5 2013, 2014, 2015**  **2016, 2017, 2018, and 2019**  **tax years. The matters were tried to conclusion**  **over several**  **months. During trial,**  **OTR**

**- MCC**  **/Brookwood and Parsippany**  **each offered**  **testimony from New Jersey certified general real estate appraisers who were accepted by the court**  **as experts in the field of**  **property valuation (the “expert” or “experts”)** 

**. 7**  **Each expert prepared appraisal report**  **s expressing**  **their opinions**  **of the subject property’s t rue**  **or fair market value as of the**  **October 1, 2008,**  **October 1, 2009, October 1, 2010, October 1, 2011 ,**  **October 1, 20 12,**  **October 1, 201 3,**  **October 1, 201 4,**  **October 1, 201 5,**  **October 1, 201 6,**  **October 1, 201 7, and**  **October 1, 201 8**  **valuation dates. 8**  **As of each valuation date, the subject property’s local property tax assessment**  **s , implied**  **equalized value s, and the**  **experts ’**  **value conclusions**  **are set forth below**  **: Valuation**  **date Local** 

**property t ax**  **a ssessment**  **Average ratio**

**of assessed to true value**  **Implied**

**e qualized**  **v alue**  **OTR**

**- MCC**  **/**

**Brookwood ’s**  **expert Parsippany’s** 

**expert 10/1/2008**  **$57,660,700 76.31%**  **$75,561,132 $46,200,000**  **$79,450,000 10/1/2009**  **$57,660,700 77.19%**  **$74,699,702 $45,700,000**  **$76,315,000 10/1/2010**  **$57,660,700 79.34%**  **$72,675,447 $49,800,000**  **$83,230,000 10/1/2011**  **$57,660,700 80.74%**  **$71,415,284 $47,000,000**  **$80,265,000 10/1/2012**  **$57,660,700 85.61%**  **$67,352,763 $45,100,000**  **$79,950,000 10/1/2013**  **$57,660,700 84.94%**  **$67,884,036 $43,800,000**  **$76,990,000 10/1/2014**  **$57,660,700 84.41%**  **$68,310,271 $41,400,000**  **$77,905,000 10/1/2015**  **$57,660,700 84.40%**  **$68,318,365 $41,300,000**  **$78,075,000 10/1/2016**  **$57,660,700 83.15%**  **$69,345,400 $32,100,000**  **$80,265,000 10/1/2017**  **$57,660,700 83.74%**  **$68,856,819 $31,900,000**  **$79,650,000 10/1/2018**  **$57,660,700 83.40%**  **$69,137,530 $31,700,000**  **$79,000,000**

**7 OTR**  **-MCC/Brookwood and Parsippany stipulated t o each expert’s qualifications.**  **8 OTR** 

**- MCC/Brookwood’s expert was initially retained to, and**  **prepare d,**  **appraisal reports for the subject property for the 2010 to 2016 tax years, dated May 5, 2017 under the Integra Realty**  **Resources banner. However, OTR**

**- MCC/Brookwood’s expert subsequently transitioned to a new**  **firm, Newmark Knight Frank, and prepared appraisal reports for the subject proper ty for the 2009**  **tax year and 2017 to 2019 tax years under their banner. OTR**  **-MCC, LLC v. Parsippany-Troy Hills Township and**

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **6 During the valuation periods at issue,**  **OTR**

**- MCC**  **sold the subject property to Brookwood**  **, under deed dated April 28, 2014, for reported consideration of $82,400,000.**  **The deed was recorded in the Morris County Clerk**  **’s Office in Deed Book 22525, Page 1076.**  **Testimony further revealed that on or about December 6, 2019, approximately fourteen**  **months after the latest valuation date involved herein, Brookwood entered into a Purchase and Sa le**  **Agreement with Monarch Owner, LLC to sell the subject property. That sal e was reportedly**  **consummated for $58,500,000, under deed dated March 9, 2020 , and**  **recorded on March 12, 2020**  **in the Morris County Clerk ’s Office**  **in Deed Book 23730, Page 1717.**
II. Conclusions of Law

**a. Presumption of Validity**  **“Original assessments and judgments of county boards of taxation are entitled to a presumption of validity.” MSGW Real Estate Fund, LLC v. Mountain Lakes Borough, 18 N.J.**  **Tax 364, 373 (Tax 1998). “Based on this presumption, the appealing taxpayer has the burden of proving that the assessment is erroneous.”**  **Pantasote Co. v. Passaic City , 100 N.J. 408, 413 (1985).**  **“The presumption of correctness . . . stands, until sufficient competent evidence to the contr ary is**  **adduced.” Little Egg Harbor Twp. v. Bonsangue, 316 N.J. Super. 271, 285** 

**- 86 (App. Div. 1998).**  **A taxpayer can only rebut the presumption by introducing “cogent evidence” of true value.**
**Pantasote Co. , 100 N.J. at 413. That is, evidence “definite, positive and certain in quality and**  **quantity to overcome the presumption.” Aetna Life I**  **ns. Co. v. Newark City, 10 N.J. 99, 105 (1952).**  **Thus, at the close of the proofs by**  **the party challenging the tax**  **assessment , the court must**  **be presented with evidence that raises a “debatable question as to the validity of t he assessment.”**  **MSGW Real Estate Fund, LLC , 18 N.J. Tax at 376.**  **Here, at the close of OTR**  **-MCC/Brookwood’s proofs, Parsippany moved to dismiss these** **OTR -MCC, LLC v. Parsippany-Troy Hills Township and** 

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **7**
**matter s, under**  **R. 4:37-**  **2(b), arguing that OTR**  **-MCC/Brookwood failed to overcome the**  **presumption of validity. Specifically, Parsippany argued that disparities existed in**  **the manner that**
**OTR**

**- MCC/Brookwood’s expert calculated**  **th e**  **“e ffective” rent**  **for the subject property and h is**  **comparable leased properties. T hus,**  **Parsippany charged that OTR**

**- MCC/Brookwood’s expert’s**  **conclusions of value should be accorded no weight. Additionally, Parsippany asserted**  **that there**

**were misstatements**  **and errors contained**  **in OTR**

**- MCC/Bro**  **okwood’s expert’s appraisal**  **reports ,**  **rendering his value conclusions of dubious usefulness. Affording**  **OTR -MCC/Brookwood**  **all reasonable and legitimate inferences which could be deduced from the evidence presented, the court concluded that**  **OTR -MCC/Brookwood produced**  **cogent evidence sufficient to overcome the presumption of validity. See**  **MSGW Real Estate Fund,**
**LLC , 18 N.J. Tax at 376 (citing Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520 (1995)). The**  **court found that the opinions of OTR** 

**- MCC/Brookwood’s e**  **xpert, if accepted as true, raised debatable questions as to the validity of the subject property’s local property tax**  **assessments. Accordingly, the court denied**  **Parsippany’s motions and placed a statement of reasons on the**  **record. However, concluding that the presumption of validity has been overcome does not equate**  **to a finding by the court that the local property tax assessments are erroneous. Once the**  **presumption has been overcome, “the court must then turn to a consideration of the evidence adduced on behalf of both parties and conclude the matter based on a fair preponderance of**  **the evidence.”**  **Ford Motor Co. v. Edison Twp., 127 N.J. 290, 312 (1992). The court must be mindful that “although there may have been enough evidence [presented] to overcome the pres**  **umption of correctness at the close of plaintiff’s case** 

**- in** 

**- chief, the burden of proof remain[s] on the [party**  **challenging the tax assessment] . . . to demonstrate that the judgment under review was inc orrect.”** **OTR -MCC, LLC v. Parsippany-Troy Hills Township and** 

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **8 Id.**  **at 314-15 (citing Pantasote Co.**  **, 100 N.J. at 413).**

**b. Highest and Best Use**  **“For local property tax assessment purposes, property must be valued at its highest and best use.” Entenmann's Inc. v. Totowa Borough, 18 N.J. Tax 540, 545 (Tax 2000)** 

**. The highest**  **and best**  **use analysis**  **is a**  **concept rooted**  **in the**  **market's perceptions of**  **value, because**  **it answers**  **the inquiry, “[w]hat**  **use would the market**  **make of**  **that property?”**  **Ford Motor Co., 127**  **N.J. at**  **302 (citation**  **omitted). To**  **accurately answer**  **that question,**  **an appraiser**  **must conduct “a**  **comprehensive market**  **analysis to**  **ascertain the supply**  **and demand**  **characteristics of**  **alternative**

**uses .”**  **Clemente , 27**  **N.J. Tax**  **at 269.**  **Thus, the**  **highest and best use analysis is the starting point in the court’s journ**  **ey to discern a property’s true or fair market value**

**. See**  **Ford Motor Co. v. Edison Twp., 10 N.J. Tax 153, 161 (Tax 1988) (concluding that the highest and best use analysis**  **is “the first and most important step in the valuation process”). Here,**  **OTR**

**- MCC/Brookwood and Parsippany stipulated that the subject property’s**  **highest and best use**  **was its**  **“ continued use as a**  **n office**  **property.” 9**  **T he court finds**  **the parties stipulation**  **is reasonable**  **and supported by the evidence. Therefore, the court conclu**  **des that the subject**  **property’s highest and best use “as improved**  **, ” is**  **its continued use as an office building.** 

**c. Valuation**  **“There is no single determinative approach to the valuation of real property.” 125 Monitor**
**St. LLC v. City of Jersey City, 21 N.J. Tax 232, 237** 

**- 38 (Tax 2004)**  **, aff’d**  **, 23 N.J. Tax 9 (App.**  **Div. 2005) (citing**  **Samuel Hird & Sons, Inc., 87 N.J. Super. at**  **72); s ee also**  **ITT Continental Baking**

**9 The Joint Stipulation does not**  **identify the subject property’s “as vacant” highest and best use.**  **However, based on the testimony and evidence adduced during trial, the court finds that the s ubject**  **property’s “as vacant” highest and best use would be development with an office building. OTR**  **-MCC, LLC v. Parsippany-Troy Hills Township and**

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **9 Co. v. East Brunswick Twp., 1 N.J. Tax 244 (Tax 1980). “There are three traditional appraisal**  **methods utilized to predict what a willing buyer would pay a willing seller on a given date ,**  **applicable to different types of prop erties: the comparable sales method, capitalization of income**  **and cost.” Brown v. Borough of Glen Rock, 19 N.J. Tax 366, 376 (App. Div. 2001) (internal citation omitted).**  **“ The decision as to which valuation approach should predominate depends upon**  **the facts of the particular case and the reaction to these facts by the experts.” Coca-**  **Cola Bottling Co. of N**  **.Y. v. Neptune Twp., 8 N.J. Tax 169, 176 (Tax 1986) (citing New Brunswick v. State Div.**  **of Tax Appeals , 39 N.J. 537, 544 (1963));**  **see also WCI**  **-Westingho use, Inc. v. Edison Twp., 7 N.J.**  **Tax 610 (Tax 1985).**

**1. Income Capitalization Approach**  **When a property is income -producing,**  **the income capitalization approach is the “preferred method for estimating the value of income producing property.”**  **Forsgate Ventures**  **IX, L.L.C.**  **v. Twp.**  **of South Hackensack**  **, 29 N.J.**  **Tax 28, 46**  **(Tax 2016),**  **aff’d , 31**  **N.J. Tax**  **135 (App. Div.**  **2018). “The**  **income capitalization approach to value consists of methods, techniques, and**  **mathematical procedures that an appraiser uses to analyze a property’s capacity to generate**  **benefits (i.e., usually the monetary benefits of income and reversion) and convert[s ] t**  **hese benefits into an indication of present value.”**  **Appraisal Institute, The Appraisal of Real Estate**  **, 439 (14**  **th ed. 2013).** 
**A f undamental**  **tenet of the**  **income capitalization ap proach is the concept of anticipation, a**  **process designed to forecast future economic benefits and convert those benefits into a present**  **value estimate. Id.**  **at 440**

**. T**  **he income capitalization**  **approach converts the anticipated**  **future stream of income and rev**  **ersionary benefit into a present value. Stated differently, the “**  **value of income-**  **producing real estate is based on the income it will produce in the future . . . . the principle OTR**  **-MCC, LLC v. Parsippany-Troy Hills Township and**

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **10 of anticipation, [is]**  **the present**  **worth of**  **future benefits**  **.” First**  **Republic Corp. of Am.**  **v. E.**  **Newark Borough, 16**  **N.J. Tax**  **568, 578 ( Tax**  **1997) . Thus, in valuing income** 

**- producing property, “[t]**  **he ultimate concern is the future** 

**. . . ,**  **the direction and expected rate of income change are critical to the capitalization of income as a valuation approach.”**  **Ibid. Here, both**  **OTR**

**- MCC/Brookwood’s expert and Parsippany’s expert concluded, and the**  **court agrees, that the income capitalization approach is the most appropriate met hod to derive the**  **subject property’s estimated true or market value.**

**A. Economic**  **or Market Rent The first st**  **ep under the income**

**- capitalization approach is forecasting a property’s potential**  **gross income. This requires an appraiser to discern “the economic rent, also known as the ‘market**  **rent’ or ‘fair rental value.’” Parkway Vill. Apartments**  **Co. v. Cranford Tw p., 1**  **08 N.J. 266, 270**  **(1987). The term**  **economic or market rent refers to “the most probable rent that a property should bring in a competitive and open market reflecting all conditions and restrictions of the le**  **ase agreement, including permitted uses, use restrictions, expense obligations, term, conces**  **sions, renewal and purchase options and tenant improvements.”**  **Appraisal Institute, The Dictionary of**  **Real Estate Appraisal , 121** 

**- 22 (5**  **th ed. 2010).**  **Th e economic or market rent allows an appraiser to**  **determine the**  **anticipated income**  **stream to be generated from**  **the property and**  **to convert that**  **future income stream**  **into a present value.**  **First Republic Corp. of**  **Am. , 16**  **N.J. Tax**  **at 578.**  **Here, o ne of the central issues in dispute**  **revolves around how each expert calculated**  **the**
**“e ffective” rent**  **of the subject property ’s leases**  **and their comparable lease**  **s. E**  **ffective rent is an analytical tool**  **e mployed by valuation experts to account for, co**  **mpare ,**  **and contrast lease terms,**  **step**

**- up provisions, and other financial concessions afforded under comparable l**  **eases in the**  **marketplace ,**  **to assist the expert**  **in developing a credible economic**  **or market rent** 

**. In sum, t**  **he OTR**  **-MCC, LLC v. Parsippany-Troy Hills Township and**

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **11 calculation of “effective” rent**  **is a mechanism that allow**  **s an appraiser to consider the step** 

**- up rent**  **payable under a**  **lease, along with any**  **financial or rent concessions afforded, in attempting to**  **compare leases and discern economic or market rent.**

**1. OTR**  **-MCC/Brookwood’s expert In determining the economic or market rent**  **that should be a scribed**  **to the subject property ,**  **OTR**

**- MCC/Brookwood’s expert**  **: (i) reviewed the**  **REIS Office Market publication**  **identifying asking rents**  **in the Parsippany** 

**- Troy Hills**  **office submarket ; (ii) examined**  **the subject property’s leasing activities**  **from 2006 to 2018**  **10 ; (iii)**  **assembled a “Peer Group (Competitive Set)” of approximately thirty** 

**- one Class A office buildings in the Parsippany** 

**- Troy Hills**  **office submarket ;**  **and (iv) identified**  **fifty (50) comparable Class A office leases**  **( ten**  **f or the 2009 tax year**  **, twenty for the 2010 to 2016 tax years, and twenty for the 2017 to 2019 tax years).**  **In calculating the “e**  **ffe ctive**  **” rent**  **per square foot of**  **the subject property’s leases and the**  **comparable office lease s**  **, OTR**  **-MCC/Brookwood’s expert testified that he** 

**calculated the average rent over a five**

**- year period for each of the**  **leases that I analyzed . . . I thought a five**

**- year period was long**  **enough to reflect, you know, free rent that’s usually given at the beginning of the lease and any kind of steps that might occur during**  **the first five years of the lease term. A lot of these leases went beyond five years but it’s not proper to go**  **too far into the future with averaging a rent . . . what I’m trying to do i**  **s identify what’s an initial effective rent, that’s from the market that an owner or investor would expect to get from the property in**  **order so that they can calculate a net income for the property.**

**10 OTR** 

**- MCC/Brookwood’s expert grouped the subject property’s**  **forty**

**- seven (47)**  **leases as**  **follows: (i)**  **thirteen (13) leases for the 2009 and 2010 tax years; (ii)**  **twelve ( 12) l**  **eases for the 2011, 2012, and 2013 tax years; (iii) eight (8) leases for the 2014, 2015, and 2016 tax years; and (iv)**  **sixteen (16) leases for the 2017, 2018, and 2019 tax years (certain leases were applied to**  **overlapping periods). OTR**  **-MCC, LLC v. Parsippany-Troy Hills Township and**

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **12 Thus,**  **to determine the “ e**  **ffective” rent of**  **the subject p roperty leases and**  **th e comparable**  **office leases ,**  **OTR**

**- MCC/Brookwood’s expert**  **a verage**  **d the annual rent “during the less er of the**  **actual lease term or the first five years of each lease. ”**  **For example, if a subject property lease or comparabl**  **e office lease**  **bore a ten** 

**- year lease term**  **with an initial rent of $2 0**  **.00, stepping up $1.0**  **0 per square foot**  **a nnually to $**  **29 .00 per square foot over the lease term**  **, OTR**  **-MCC/Brookwood’s expert average**  **d only the first five years rent**  **, and**  **appl ied**  **an “ e**  **ffective ” rent of $22.00 per square**  **foot ($20 + $21 + $22 + $2**  **3 + $**  **24 = 1**  **10/5 = $22.00), disregard**  **ing any rent payable thereafter.** 
**In OTR -MCC/Brookwood’s expert’s opinion,**  **[t]ime value of money’s another reason why you wouldn’t want to average a rent over**  **a long period of time . . . i**  **f I was going to do an average over a long period of time, say**  **ten years, I would be giving**  **equal weight to the rent paid in year ten**  **versus rent paid in year one**  **so it would be improper. You’d get a . . . skewed indication of**  **market rent if you go out too far because of the time value of money. After**  **applying his formula**  **to the subject property’s leases,**  **OTR -MCC/Brookwood’s**  **expert conclud**  **ed that the subject property’s “effective” rent**  **s : (i) for the 2009 tax year,**  **ranged from $24.73 to $31.80 per square foot, with an average of $26.47**  **; 11**  **(ii) for the 2010 tax year ,**  **ranged from $20.30 to $31.80 per square foot, with an average of $27.08 ;**  **12 (iii) for the 2011**  **tax year, ranged from $23.32 to $26.23, with an average of $24.91; (iv) for the 2012 tax year, ranged**  **from $24.65 to $27.47, with an average of $26.37; (v) for the 2013 tax year, ranged from $25.29**  **to $28.75, with an average of $26.97; (vi) for the 2014 tax year, ranged from $26.54 to $28.55, with an average of $28.04; (vii) for the 2015 tax year, ranged from $27.52 to $29.50, with an** 

**11 OTR**  **-MCC/Brookwood’s expert’s November 18, 2019 appraisal report** 

**. 12**  **OTR**

**- MCC/Brookwood’s expert’s May 5, 2017**  **appraisal report ,**  **covering the 2010 to 2016 tax**  **years, identifies the range as “subject leases between 2007 & 2010” and having a “date range” of**  **1/1/2007 to 12/31/2009. OTR**  **-MCC, LLC v. Parsippany-Troy Hills Township and**

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **13 average of $28.51;**  **(v iii**  **) for the 201 6**  **tax year, ranged from $22.88 to $28.24, with an average of**  **$25.69 13**  **; (ix) for the 20**  **17, 2018, and 2019 tax years, ranged from $22.88 to $28.24, with an average of $25.48.**  **14 Next,**  **OTR**

**- MCC/Brookwood’s expert applied his five** 

**- year “effective” rent formula to his**  **fifty comparable office**  **leases. After calculating the “effective” rent of his comparable leases,**
**OTR**

**- MCC/Brookwood’s expert**  **a pplied adjustments to**  **t he**  **“e ffective**  **” rent**  **of sev eral comparable**  **leases to account for**  **perceived differences in expense structure (between 3.5% to**  **11 %) and**  **economic characteristics, including inferior or superior**  **concessions, tenant improvement allowances**  **, or other economic factors that**  **influenc ed the**  **re ntal rate (**  **-15% to 10%). After applying**  **the adjustments, OTR** 

**- MCC/Brookwood’s expert determined a range of**  **adjusted “e ffective**  **” rents**  **for his comparable office**  **leases of : (i) $24.73 to $30.49 for the 2009 tax** 
**year , with an average of $27.80**  **; (ii) $20.52 to $30.49 for the 2010, 2011, and 2012 tax years**  **, with an average of $25.47**  **; (iii) $18.86 to $26.21**  **for the 2013, 2014, 2015, and 2016 tax years, with an**  **average of $21.97 ; (**  **i v) $19.34 to $27.41 for the 2017**  **tax year , with an average of $24.96**  **; (v) $18.35 to $27.11 for the 2018 tax year, with an average of $23.93; and (vi) $22.68 to $26.34 for**  **the 2019 tax year, with an average of $24.99.**  **15 Ultimately, OTR** 

**- MCC/Brookwood’s expert**  **ascribed a market or economic rent to the**  **subject property’s 529,362 squ are feet of**  **leasable area of: (i) $27.00 per square foot for the 2009,** 

**13 As of the date of the May 5, 2017 date of his appraisal report.**  **14 OTR** 

**- MCC/Brookwood’s expert’s range and average includes five (5) leases identifie**  **d for the 2016 tax year.**  **15 OTR** 

**- MCC/Brookwood’s expert’s November 18, 2019 appraisal reports provide a rent range**  **for each calendar year. However, OTR**

**- MCC/Brookwood’s expert’s May 5, 2017 appraisal report**  **does not provide a range for each calendar year, but rather provides a grouping of the 2010, 2011, and 2012 calendar years, and the 2013, 2014, 2015 and 2016 calendar years.** **OTR -MCC, LLC v. Parsippany-Troy Hills Township and** 

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **14 2010, 2011, and**  **2012 tax years; (ii) $26.00 per square foot for the 2013**  **and 2014 tax years;**  **and (iii) $25.00 per square foot for the 2015, 2016, 2017, 2018, and 2019 tax years.** 

**2. Parsippany’s expert** 
**In Parsippany’s expert**  **’s opinion , Parsippany** 

**- Troy Hills “is a market unto its own,” thus,**  **in formulating his opinion of the subject property’s economic or market rent, Parsippany’s**  **expert focused his analysis on the subject property leases and comparable leases**  **with in the Parsippany** 

**** **Troy Hills office submarket.**  **I n Parsippany’s expert’s opinion,**  **the office campus where the subject property is situated** 

**is the finest campus that Parsippany has, and this [the subject**  **property] is the finest building of the four [buildings on the office campus] in the context of their quality, construction, and detail went**  **into their constructions, the floors are granite, the walls are wood paneled sixteen** 

**- foot high, the doors are solid core with brass and**  **nickel fixtures, . . . it’s an absolute beautiful building, which in large part is owing to the fact that their target market is Fortune 500**  **companies, large users, so it’s as nice a building and, in my opinion, the nicest park that Parsippany has to date.**  **Moreover, Parsippany’s expert further expressed that the subject property is “m aintained**  **impeccably” and “**  **is our [Parsippany’s]**  **best building ,”**  **within the Class A buildings in the Parsippany-**  **Troy Hills submarket.**  **Parsippany’s expert further**  **expressed that , i**  **n his opinion, the subject property leases**  **offer the**  **best indicat ion**  **of the subject property’s**  **market or economic rent because they**  **reflect actual lease**  **agreements during the valuation periods**  **at issue**

**. Thus, in arriving at his economic**  **or market**
**rent conclusion, Parsippany’s expert**  **attributed the greatest weight to the subject property leases. In gaug**  **ing the strength of the Parsippany-**  **Troy Hills office submarket, Parsippany’s expert** 
**ge nerated two CoStar**  **reports for all classes of buildings in the Parsippany**

**- Troy Hills office**  **submarket and reviewed the net absorption rates**  **and vacancy rates for the 2008 through 2018** **OTR -MCC, LLC v. Parsippany-Troy Hills Township and** 

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **15**
**years**
**. According to Parsippany’s expert**  **, from 2008 to 2013, the Parsippany** 

**- Troy Hills**  **Class A office submarket experienced steadily increasing vacancy rates, periods of negati**  **ve net absorption ,**  **and thus, declining rental rates**

**. 16**  **However, in Parsippany’s expert’s opinion,**  **because the**  **Parsippany- Troy Hills**  **Class A office submarket generally experienced**  **positive net absorption** 
**f rom 2014 through 2018, along with declin**  **ing vacancy rates, the Parsippany** 

**- Troy Hills submarket**  **became strong**  **er**

**and experienced**  **a corresponding increase in rental rates.** 
**Pa rsippany’s expert**  **identified six subject property leases and seven comparable Class A**  **office leases within the Parsippany**

**- Troy Hills**  **Class A office submarket**  **that he opined were the most representative of the**  **subject property’s economic or market rent** 

**. In grouping his comparable**  **office leases, Parsippany’s expert employed**  **: (i) four leases for the 2009, 2012, 2013, 2015, 2016,**  **2017, 2018, and 2019 tax years; ( ii)**  **five leases for the 2010**  **and 2014 tax year**  **s; and**  **(iii) six**  **leases for**  **the 2011 tax year. Unlike**  **the approach adopted by OTR**

**- MCC/Brookwood’s expert, i**  **n calculating the**
**“e ffective**  **” rent of his thirteen (13) Class A**  **office lease s, Parsippany’s expert**  **testified that he**

**calculated the rent over the initial term of the lease, ten**

**- year lease,**  **ten**

**- year average; a five** 

**- year lease, is a five** 

**- year average, I don’t**  **manipulate or change the terms, that methodology is the most widely accepted**  **protocol in analyzing a lease, in my mind, . . . it is that marriage, it is that deal between the lessor and the lessee, it is**  **an anticipation of debt service payment, . . . the bigger picture is in**  **analyzing a rent you have to understand all the parties**  **related to that, that a property is sold . . .**  **based on an entire lease term, expectancy of revenue, and it’s financed on that basis and it’s sold on that basis,**  **so I analyzed it on that basis, so to be consistent with the broader**

**16 Absorption rate is defined as “[t]he**  **rate at which properties for sale or lease have been or are expected to be successfully marketed, sold or leased in a given area over a duration of tim**  **e.” The**  **Dictionary of Real Estate Appraisal at 1. Thus, a negative net absorption rate would indicate t**  **hat less space was leased than what was vacated/offered in the marketplace. Correspondi**  **ngly, a positive net absorption rate would indicate that more space was**  **leased than what was vacated/offered in the marketplace.** **OTR -MCC, LLC v. Parsippany-Troy Hills Township and** 

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **16 picture of how investment**  **grade [buildings are]**  **transacted, there is**

**much more going on than an interpretation, . . . capitalization rates**  **are built on that expectancy, in my opinion . . . [it]**  **is the full measure of what the investors**  **can reasonably anticipate, not some formulat e**  **that**

**. . . is not parallel to derivation of capitalization rates, the market**  **standing, or the transactions. . . . Thus, Parsippany’s expert accounted for any financial or rent concessions and**  **average d the**  **annual rent payable over the**  **actual lease term ,**  **without consideration of the length of each lease** 

**. For example, if a comparably identified office lease bore a ten** 

**- year**  **lease term with an initial rent**  **of $2 0**  **.00, stepping up $ 1**  **.00 per square foot annually to $ 29**  **.00 per square foot , Parsippany’s**  **expert would apply a** 

**r ent of $**  **24.5 0 per square foot**  **to the lease (**  **$20 + $21**  **+ $2 2 + $23**  **+ $2 4**  **+ $25**  **+ $ 26**  **+ $ 27**  **+ $ 28**  **+ $ 29**  **= $ 245**  **/10 = $2 4.50**  **), the average rent**  **payable over the ten** 

**- year lease** 
**term (in contrast to OTR** 

**- MCC/Brookwood’s expert who considered only the first five years of**  **the lease and whose “effective” rent would be computed to $22.00 per square foot). The unadjusted range**  **of Parsippany’s expert’s**  **thirteen lease rent**  **s w ere**  **: (i) $25.21 t o**  **$29.60, for the 2009 tax year, with an average of $27.31; (ii) $25.21 to $36.76, for the 2010 tax**  **year, with an average of $29.20; (iii) $25.21 to $36.76, for the 2011**  **tax year, with an average of $28.61**  **; (i v**  **) $25.69 to $36.76 ,**  **for the 2012 tax year, wit**  **h an average of $ 30.11**  **; (v) $25.69 to $36.76, for the 2013 tax year, with an average of $**  **31.14 ; (vi)**  **$24.5 9 to $33.10**  **, for the 2014**  **tax year, with an average of $28.56; (vii) $24.59 to $33.10, for the 2015, 2016,**  **and 2017 tax years,**  **with an average of $29.28; (viii) $25.59 to $33.10 ,**  **for the 2 018 tax years**  **, with an average of $28.38; and (**  **ix ) $24.59 to $28.80, for the 2019 tax year, with an average of $26.57.**  **Next, Parsippany’s expert applied**  **adjustments to three of the**  **comparable leases (ranging**  **from**

**- 5% to 10%) to account for**  **difference s**  **in lease t ype**  **(net and gross versus modified gross)** 

**. The**  **range of adjusted rents for Parsippany’s expert’s thirteen comparable leases were: (i) $25.21** **OTR -MCC, LLC v. Parsippany-Troy Hills Township and** 

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **17 to $29.60, for the 2009 tax year, with an average of $27.94**  **; (ii) $25.21 to $36.76, for the 2010**  **tax year, with an average of $**  **29.70; 17**  **(iii) $25.21 to $36.76, for the 2011 tax year, with an average of $29.04;**  **18 (i**  **v ) $25.69 to $36.76, for the 2012**  **tax year , with an average of $30.12**  **; 19**  **(v) $25.69 to**  **$36.76, for the 2013 tax year, with an average of $31.14; 20**  **(vi) $25.69 to $33.10, for the 2014 tax** 
**year , with an average of $29.06**  **; 21**  **(v ii**  **) $27.05 to $33.10, for the 2015, 2016, and 2017**  **tax years ,**  **with an average of $29.90 ;**  **22 (vi**  **ii )**  **$24.10 to $33.10, for the 2018 tax y ear**  **, with an average of $28.67;**  **23 and (**  **ix ) $24.10 to $28.80, for the 2019 tax year, with an average of $26.86.** 
**In arriving at his conclusion of economic or market rent, Parsippany’s expert**  **placed the**  **greate st**  **weight on t**  **he subject property’s leases because, although all comparable leases were similarly located**  **in Class A office buildings in the Parsippany**

**- Troy Hills submarket**  **, he viewed the subject property as the “best of the**  **[ Class**  **] A” office buildings in the Parsippany** 

**- Troy Hills** 

**17 During cross** 

**- examination, Parsippany’s expert acknowledged that the adjusted rent for**  **Improved Lease No. 5 should be $34.07 per square foot. Thus, the range of adjusted rents should have been $25.21 to $34.07, for the 2010 tax year, with an average of $29.17.**  **18 During cross** 

**- examination, Parsippany’s expert acknowledged that the adjusted rent for**  **Improved Lease No. 5 should be $34.07 per square foot. Thus, the range of adjusted rents should have been $25.21 to $34.07, for the 2011 tax year, with an average of $28.59.**  **19 During cross** 

**- exami**  **nation, Parsippany’s expert acknowledged that the adjusted rent for Improved Lease No. 5 should be $34.07 per square foot. Thus, the range of adjusted rents should**  **have been $25.69 to $34.07, for the 2012 tax year, with an average of $29.44. 20**  **During cr oss-**  **examination, Parsippany’s expert acknowledged that the adjusted rent for Improved Lease No. 5 should be $34.07 per square foot, and the adjusted rent for Improved Lease**  **No. 8 should be $29.88 per square foot**

**. Thus, the range of adjusted rents should have been $25.69**  **to $34.07, for the 2013 tax year, with an average of $29.66. 21**  **During cross**

**- examination, Parsippany’s expert acknowledged that the adjusted rent**  **for Improved Lease No. 8 should be $29.88 per square foot. Thus, the range of adjusted rents should**  **have been $25.69 to $30.44, for the 2014 tax year, with an average of $28.41. 22**  **During cross**

**- examination, Parsippany’s expert acknowledged that the adju**  **sted rent for**  **Improved Lease No. 8 should be $29.88 per square foot. Thus, the range of adjusted rents should have been $27.05 to $30.44, for the 2015, 2016, and 2017 tax years, with an average of $29.09.**  **23 During cross** 

**- examination, Parsippany’s expert acknowledged that the adjusted rent**  **for Improved Lease No. 8 should be $29.88 per square foot. Thus, the range of adjusted rents should**  **have been $24.10 to $30.44, for the 2018 tax year, with an average of $27.87. OTR**  **-MCC, LLC v. Parsippany-Troy Hills Township and**

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **18 submarket.**  **Ultimately, Parsippany’s expert ascribed a market or economic rent to the su bject**  **property’s 529,362 square feet of leasable**  **area of: (i) $29.00 for the 2009, 2010, and 2011 tax**  **years; and (ii) $28.00 for the 2012, 2013, 2014, 2015, 2016, 2017, 2018, and 2019 tax years.**

**3. Court**  **’s analysis**  **At the outset, the court emphasizes that it**  **finds Parsippany’s expert’s testimony that the subject property**  **is one of “**  **the finest campus [es]**  **that Parsippany has ” to offer,**  **and th at**  **the subject property**  **is one of**  **the premier Class A office buildings in**  **the Parsippany- Troy Hills marketplace**  **, to be credible** 

**. The**  **photographic evidence and**  **testimony of both experts revealed that the subject property possesses several striking**  **physical at tributes, amenities,**  **and features**  **that a**  **re unique**  **and distinct from other Class A office buildings in the Parsippany-**  **Troy Hills marketplace. Moreover, the court finds the**  **experts’ testimony that**  **rent step -ups**  **and financial /**  **rent concessions were a**  **staple of the Parsippany**

**- Troy Hills Class A office submarket during the tax**  **years at issue to be credible. However,**  **t he court finds that the methodology**  **employed by both experts in calculating “effective” rent suffer from potential pitfalls that**  **may mater**  **ially impact the accuracy, and thus, the credibility of their economic or market rent conclusions.**  **As expressed above, t he income** 

**- capitalization approach is premised on the**  **conversion of an anticipated stream of income into a present value. As cogently explained by Judge Crabtre**  **e,**

**Value is created by the anticipation of future benefits. The**  **value of**  **income-producing real**  **estate is**  **based on the income**  **it will**  **produce in**  **the future** 

**. Failure**  **to consider**  **future income**  **contradicts the**  **principle of anticipat**  **ion,** i.e., **the present**  **worth of**  **future benefits.**  **The ultimate concern is the future, and while current income is a good starting point, the direction and expected rate of income**  **change are critical to the capitalization of income as a valuation approach** 

**. Accordingly, where income changes are known, as is the case with**  **step**

**- up leases, those increases in income, to the extent they reflect** **OTR -MCC, LLC v. Parsippany-Troy Hills Township and** 

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **19 economic rent, should be reflected in the appraiser's estimate of the** 

**property's future income. The**  **rationale for**  **the step**  **-up lease**  **is the landlord's**  **willingness to**  **accept smaller**  **rent in**  **the early**  **years to**  **assist a**  **tenant in**  **establishing a**  **new business or**  **an old business**  **in a**  **new location.**  **The step**  **-up lease**  **may also**  **reflect the owner's**  **recognition of tenant**  **exp enditures,**  **which are,**  **in effect,**  **amortized over the**  **early years**  **of the**  **lease when**  **rent payments**  **are smaller.**  **[ First**  **Republic Corp. of Am.**  **,16 N.J.**  **Tax at**  **578 (internal**  **citations omitted)**  **(emphasis added).]**  **Effective rent is defined as “[t]he rental rate n et of financial concessions such as periods of**  **free rent during the lease term**

**. . . . ”**  **The Appraisal of Real Estate ,**  **at 448.**  **Although our courts have consistently found that “**  **economic rent [must]**  **reflect []**  **rent concessions, which are supported by comparable leases . . . as well as current leases in the subject property itself**  **,” no rigid formula**  **has been adopted delineating how “effective” rent**  **should be**  **calculated. Glen Pointe Associates v. Teaneck Twp., 10 N.J. Tax 506, 522 fn3 (Tax 1989),**  **aff’d , 12 N.J. Tax 127 (App. Div. 1991)** 

**. See also**  **Shav Associates v. Middletown Twp., 11 N.J. Tax 569, 579 (Tax 1991) (concluding that “[i]t is necessary to consider rent concessions in arriving at economic**  **rent”). According to one treatise, effective rent “may be calculated in several different w**  **ays. It may be estimated based on rental income from existing leases at market rates and terms**  **, or rental**  **income from leases at market rates and terms , depending on**  **the intended use of the appraisal.” Appraisal Institute,**  **The Appraisal of Real Estate , 422 (15**  **th ed. 2020).**  **Therefore , pivotal to either**  **method of calculating “effective” rent is the appraiser’s analysis of the marketplace. O**  **nly through the appraiser’s**  **comprehensive analysis of the leases and marketplace data can he or she discern**  **the anticipated income stream and f uture economic benefit that the property owner reasonably**  **expects to derive**

**. W**  **hen the marketplace demands leases contain rent step -ups,**  **rent concessions,**  **or other OTR**  **-MCC, LLC v. Parsippany-Troy Hills Township and**

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **20 financial incentives**  **, the valuation expert**  **must account for these factors**  **in attempting to discern the economic**  **or market rent**  **because they materially impact the anticipated income stream. Thus,** 
**t he “effective**  **” rent calculation is i ntended to serve as an analytical tool enabling appraisers to**  **weigh, distinguish, differentiate, and reconcile lease terms, step** 

**- up provisions, and other financial**  **concessions under comparable l eases**  **, to assist the appraiser in developing a credible economic**  **or market rent** 

**. This analysis**  **pays deference to the principal that under the income capitalization**  **approach, the**  **present value must**  **account for the future economic benefits to be received by the property owner**  **over the anticipated lease term**

**. Accordingly, when undertaking an “effective” rent analysis, the valuation expert’s**  **investigation must include: (i)**  **an in**

**- depth scrutiny of**  **the comparable an**  **d competitive leases in the marketplace**  **; (ii) data regarding the typical term of those leases to gauge the**  **anticipated length of the**  **income flow; (iii)**  **what, if any, step**

**- up rent is payable under the leases; (iv) an analysis of**  **whether the step**

**- up rent accurately reflects market or economic rent**  **; and (v)**  **what are typical and atypical financial or rent concessions in the marketplace.**  **Here, in arriving at his calculation of “effective” rent, OTR**

**- MCC/Brookwood’s expert**  **limited his consideration to the rent payable only during the first five years of each lease, without**  **consideration as**  **to what the market dictated was the average length**  **of Class A office lease s**  **in the Parsippany-**  **Troy Hills submarket**

**. Moreover, OTR** 

**- MCC/Brookwood’s expert testified that “what**  **I’m trying to do is identify what’s an initial effective rent**  **, . . .” H owever**  **, ascertaining the**  **“ initial**  **effective rent ”**  **and arbitrarily limiting the analysis to only the first five years of rent payable**  **without consideration of what the marketplace dictates is the reasonable term of a Class A office**  **lease, fail s to**  **adequately consider**  **the anticipated revenue and**  **the reasonable expectations of**  **property owners of Class A office buildings in the Par sippany-**  **Troy Hills submarket**

**. In sum,** **OTR -MCC, LLC v. Parsippany-Troy Hills Township and** 

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **21 OTR** 

**- MCC/Brookwood’s expert offered no evidence**  **either during trial or in his appraisal report**  **s that the five** 

**- year period**  **he utilized represented**  **a benchmark for Class A office leases in the**  **Parsippany- Troy Hills subma**  **rket. To the contrary, OTR** 

**- MCC/Brookwood’s expert**  **acknowledged that “[a] lot of these**  **[comparable] leases went beyond five years but it’s not proper to go too far into the future with**  **averaging a rent.” Significantly h**  **owever, OTR**

**- MCC/Brookwood’s expert**  **later expressed that for**  **purposes of amortizing h is**  **tenant improvement allowance, a seven**

**- year lease term should be**  **applied because, in his opinion, seven**  **year s**  **represented the typical length of Class A office**  **lease s**  **in t he northern New Jersey marketplace.**  **Thus, despite opining**  **that the typical length of a Class A office lease in the marketplace was seven years**  **, OTR** 

**- MCC/Brookwood’s expert elected to**  **apply a n**  **indiscriminate five** 

**- year**  **period in calculat**  **ing his “effective” r**  **ent. Accordingly, the court finds OTR** 

**- MCC/Brookwood’s expert’s consideration of only the first five years under each**  **subject property lease**  **and comparable lease for purposes of**  **his “ effective**  **” rent calculation**  **to be arbitrary**  **, not appropriately derived fr om the marketplace**  **, and unreliable. Similarly,**  **the court finds Parsippany’s expert ’s**  **method of calculating the “**  **effective ”**  **rent by**  **averaging the rent over the entire lease term also unreliable. Parsippany’s expert seemingly**  **gave no consideration to whethe r the**  **proffered lease term**  **s exceeded marketplace norms**  **, offering no analysis of what the typical length of a Class A office lease was in the Pars**  **ippany**

**- Troy Hills**  **submarket during the periods at issue. Thus, the court questions whether the rent step**  **-ups contained under those leases accurately reflected economic or market rent, or merel**  **y represented the property owner’s best guess of what economic or market rent may be fifteen or twenty yea**  **rs into the future. Averaging the rent payable in the**  **twe ntieth**  **year of a lease with the rent payable in the first**  **year of a lease without consideration to whether the length of that lease is atypica l in** **OTR -MCC, LLC v. Parsippany-Troy Hills Township and** 

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **22 the marketplace, will produce an inaccurate representation of the future retur**  **n that a property**

**owner reasona**

**bly anticipates from their investment. Accordingly, the court finds Parsippany’s**  **expert’s formula for calculating “effective” rent over the entire**  **term of the subject property leases**  **and comparable leases unreliable. Rather, the court finds that the calcu**  **lation of “effective” rent must be harmonious and co**

  ** exist with the appraisers’ review and analysis of** **data in the marketplace. For example, if the marketplace data discloses that**  **Class A building**  **property owners reasonably anticipate an income**
**stream to**  **be generated from their leases over ten year**  **s , with rent concessions and tenant**  **improvement allowances amortized over that same**  **ten**

**- year**  **period , then the “effective” rent**  **calculation should account for the rent step**

**- ups and financial**  **or rent concessions**  **af forded over**  **the**
**ten**

**- year lease term.**  **However, i f**  **the analysis of the marketplace data discloses that**  **Class A building**  **property owners reasonably anticipate a ten** 

**- year**  **income stream, but the proposed**  **comparable lease is for a term of twenty y**  **ears, then averaging the rent over only**  **the first five years or averaging the rent over the entire**  **twenty**

**- year**  **term will artificially inflate or deflate**  **the “effective” rent and**  **, correspondingly, the concluded economic or market rent ascribed thereto.**
**T he court**  **agrees with OTR** 

**- MCC/Brookwood’s expert**  **’s conclusion that**  **“you wouldn’t want to average a rent over a long period of time**  **,” because that would afford equal weight to the**  **rent payable during the first month of the lease as it would to rent payable in the one -hundred-**  **and**

  ** eightieth month under the lease.** **However, for substantially the same reasons**  **that is why the calculation of “effective” rent must not be arbitrarily or blindly applied. The**  **court finds that the calculation of “effective” rent herein should not be manipulated or affected by the**  **appraisers’ artificial application of**  **limited evaluation periods, or**  **the selection of leases that are predominantly**  **shorter or longer than the average term of Class A office leases in the marketplace. Rather, the** **OTR -MCC, LLC v. Parsippany-Troy Hills Township and** 

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **23 court concludes that the calculation of “effective” rent must be harmonious with t**  **he appraisers’ analysis of the marketplace data and what the reasonable expectations of Class A prope**  **rty owner s** 

**are in the Parsippany-**  **Troy Hills submarket. Here,**  **the court’s review of OTR** 

**- MCC/Brookwood’s expert’s**  **forty**

**- seven**  **subject property leases and**  **fifty comparable leases**  **demonstrated the following average**  **lease term**  **:**
**2009 2010**  **2011 to 2013 2014 to 2016**  **2017 to 2019 Subject property leases**  **74 months 79.92 months**  **65.33 months 82.5 months**  **76.5 months Comparable lease**  **s 101 months**  **88.5 months 98.57 months**  **71.29 months 110.4 months**  **Moreover, the court’s review of Parsippany’s expert’s six subject property leases and seven**  **comparable leases revealed an average lease term of 104.31 months.**
**Th e foregoing data demonstrates to the court that owners of Class A office buildings in**  **the Parsippany-**  **Troy Hills office submarket reasonably anticipated a n income**  **stream and amortization of financial concessions under their leases**  **ranging from 65.33 months (6 years, 3 months) to 110.40 months (9 years, 4 months)**  **, or between one**  **to four years**  **longer than the five**

**- year formula**  **applied by OTR-MCC/Brookwood’s expert in calculating his “effective” rent.**  **Accordingly, the court finds that during all**  **tax years at issue, property owners of Class A office buildings in the Parsippany** 

**- Troy Hills submarket reasonably anticipated an eight** 

**- year** 
**revenue stream and**  **, correspondingly, would include rent step** 

**- ups and**  **amortize financial/rent**  **concessions, over the same eight-**  **year time**  **-period. Therefore,**  **t he court finds that the market data**  **and evidence demonstrate that**  **in calculating the “effective” rent ,**  **an eight**

**- year**  **period should be**  **employed. However, b**  **ecause the trial record does not contain evidence of t**  **he step**

**- up rent payable**  **under OTR**

**- MCC/Brookwood’s expert’s comparable**  **office leases, the court is unable to**  **determine the “effective” rent under those leases**  **based on an eight-**  **year calculation period**  **. Moreover, the** **OTR -MCC, LLC v. Parsippany-Troy Hills Township and** 

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **24 court finds**  **Parsippany’s expert’s seven comparable office leases**  **to be unreliable**

**. 24**  **Therefore, the court excludes from consideration OTR** 

**- MCC/Brookwood’s expert’s fifty**  **non- subject property**  **comparable leases and Parsippany’s expert’s seven non** 

**- subject property comparable leases**  **in determining the subject property’s economic or market rent.**  **Importantly, the court finds credible Parsippany’s expert’s conclusion that the subject**  **property’s leases offer the best indicat ion**  **and evidence of the subject property’s economic or market rent**  **for all tax years at issue.**  **Here, OTR** 

**- MCC/Brookwood’s exper**  **t identified forty** 

**- seven**  **subject property new and renewal leases e xecuted**  **between 200 6**  **and 2018 . In addition,**  **Parsippany’s expert identified six subject property new and renewal leases en**  **tered between 2008 and 2018.**  **Therefore, the court finds that an abundance of**  **credible market data exists in the trial record**  **enabling the court to calculate the “effective” rent of the subject property leases o**  **ver an eight** 

**- year**  **period, and to arrive at a determin ation**  **of the subject property’s economic or market rent. T he** 
**court further**  **emphasizes that consideration of only**  **the subject property leases alleviates the need**

**24 Parsippany’s expert’s**  **Improved Lease No. 1 charged flat rent of**  **$25.21 per square foot**  **over the lease term**  **and Improved Lease No. 5 charged flat rent of $36.76 per square foot over the lease**  **term. However, Parsippany’s expert admitted during cross-**  **examination that he failed to consider the impact of either below** 

**- market**  **or above**

**- market tenant improvement allowances.**  **Because the court**  **has no information regarding the tenant improvement allowances for these properties, the court accords no weight to their rents in discerning the subject property’s economic or mar**  **ket rent. In addition, Parsippany’s expert’s Improved Lease No. 2, Improved**  **Lease No. 10 and Improved**  **Lease No. 11 we**  **re “Net” and “Gross” lease arrangements, requiring adjustments to account for the different lease types. However, effective cross** 

**- examination disclosed that with respect to**  **Improved Lease No. 10, Parsippany’s expert’s adjustments did not accurately account f or**  **differences between a modified gross lease and net lease. Moreover, effective cros s**  **- examination**  **further disclosed that with respect to Improved Lease No. 11, the tenant was res ponsible for certain**  **operating costs, shell rent, and tenant improvement rent, not accounted for by Parsippany’s expert.**  **Accordingly, the court accords no weight to Parsippany’s expert’s Improved Lease No. 10 and Improved Lease No. 11 in discerning the subject property’s economic or ma**  **rket rent. OTR**  **-MCC, LLC v. Parsippany-Troy Hills Township and**

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **25 to attempt to quantify and apply adjustments to account for differing lease types, varying le**  **ase terms, or economic conditions that may or may not have played a role in the rents payable**  **thereunder.**
**T he court**  **’s review**  **and analysis of t**  **he “effective” rent of the**  **subject property’s forty**

**- seven**  **new and renewal leases , based on an average eight** 

**- year term,**  **disclosed the following:**  **25 (i) for the** 
**2009 and 2010**  **tax year s**  **, the “**  **effective ”**  **rent for the thirteen leases**  **, including financial/**  **rent concessions, ranged from**  **$26.00 to $3**  **2.00 per square foot, with a mean of $2**  **8.16; 26**  **(ii) for the**  **2011, 2012, and** 

**2013 tax years, the**  **“ effective**  **” rent for the twelve leases**  **, including financial/rent**  **concessions, ranged from $21.53 to $28.75 per square foot, with a mean of $26. 16;**  **27 (iii) for the**  **2014, 2015, and 2016 tax years, the “**  **effective ”**  **rent for the eleven leases**  **, including financial/rent**  **concessions, ranged from $25.72**  **to $29.71**  **per square foot, with a mean of $27.2 5;**  **28 and (**  **i v) for**  **the 2017, 2018, and 2019 tax years, the “**  **effective ”**  **rent for the eleven leases**  **, including financial/**  **rent concessions, ranged from $2 6.10**  **to $ 28.74**  **per square foot, with a mean of $26. 75.**  **29**
**T he court**  **highlights that**  **the subject property’s leases**  **experienced the steepest decline**  **in rental**
**rates in 2011**  **, 2012 , and 2013. However, as credibly testified by Parsippany’s expert, vacancy**  **rates began to subside**  **and the subject property’s economic or market rents began to experience a**  **rebound with the improving economy. Accordingly, the court finds that the subject property should be ascribed a market or** 

**25 To calculate the “effective” rent on the eight** 

**- year average lease term, the court reviewed OTR** 

**** **MCC/Brookwood’s expert’s appraisal reports (Leased Status of Property) and the adde ndum**  **thereto containing the subject property rent rolls. In addition, the court reviewed th e addendum to**  **Parsippany’s expert’s appraisal report containing the subject property’s rent rolls.**  **26 Leases executed between 9/1/2006 to 11/24/2008.**  **27 Leases executed between 12/17/2009 to 1/1/2012.**  **28 Leases executed between**  **2/15/2013 to 9/1/2015. 29**  **Leases executed between 1/1/2017 to 12/1/2018. OTR**  **-MCC, LLC v. Parsippany-Troy Hills Township and**

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **26 economic rent of: (i) $28.**  **00 for**  **the 2009**  **and 2010 tax year**  **s ; (ii)**  **$26.25 for the**  **2011, 2012, and**
**2013 tax years; (i**  **ii ) $27.**  **25 for the**  **2014 , 2015, and 2016**  **tax years; and**  **(iv ) $2**  **7.00 for**  **the 2017, 2018, and 2019 tax years.** 

**B. T**  **enant electricity** 
**T he subject property**  **is leased on a**  **modified gross**  **basis ,**  **plus tenant electric basis. Thus,**
**OTR -MCC/Brookwood**  **is responsible for the**  **operating expenses of the subject property**  **except for**  **tenant electric. Each**  **tenant pay s**  **or reimburse s**  **OTR**

**- MCC/Brookwood for their electricity** 
**expenses on a per square foot basis.**  **Here, the experts agreed that the market rate of**  **reimbursed tenant electric**  **ity w**  **as $1.50 per**  **square foot for all tax years**  **. However, t he**  **y applied the reimbursed tenant electric ity**  **on their reconstructed operating statements**  **in different manners.**
**OTR**

**- MCC/Brookwood’s expert deducted $1.50 per square foot from his concluded**  **stabilized uti lity expense**  **to account for the offsetting**  **tenant reimbursed electricity t hat would be**  **paid to the property**  **owner**
**. For example, if the stabilized utility expense for the subject property**  **was $3.00 per square foot, OTR**

**- MCC/Brookwood’s expert deducted reimbursed tenant electric**  **ity of $1.50 per square foot to arrive at a net stabilized utility expense of $1.50 per square foot ($3.00** 

**- $1.50 = $1.50 net stabilized utility expense). Conversely, Parsippany’s expert**  **added $1.50 per**  **square foot of t**  **enant reimbursed**  **electric ity**  **income in deriving the subject property’s**  **potential gross income.**  **Accordingly, Parsippany’s expert made no**  **adjustment to his stabilized utility**
**expense to account for**  **the reimbursed tenant electricity** 

**. The court’s research d**  **i sclose**  **s that**  **both methods of characterizing tenant**  **reimbursed electric**  **ity are**  **appropriate, and that the choice of approach is**  **purely stylistic** 

**. Accordingly,**  **for purposes of**  **simplicity and clarity in generating**  **the reconstructed operating statement**  **s, the court** **OTR -MCC, LLC v. Parsippany-Troy Hills Township and** 

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **27 will**  **deduct from its concluded stabilized utility expense the reimbursed tenant electricity of**  **$1.50 per square foot, thereby producing a net stabilized utility expense.** 

**C. Vacancy**  **and Collectio n Loss**  **In arriving at his vacancy and collection loss**  **rates, OTR -MCC/Brookwood’s**  **expert consulted**  **REIS Office Market Reports publications**  **, reviewed the subject property’s vacancy rates,**  **surveyed vacancy rates from a “Peer Group” of office buildings in the Parsippany**

**- Troy Hills**  **submarket he assembled, and reviewed CoStar office reports**

**. First,**  **OTR**

**- MCC/Brookwood’s expert review**  **ed the REIS Office Market**  **Reports which**  **revealed that absorption was negative**  **in 2009, 2010, 2012, 2016, and 2017, reflecting a declining market, but positive in 2011, 2013, 2015, and 2018, reflecting an improving market.**  **According**
**to OTR**

**- MCC/Brookwood’s expert, the REIS Office Ma**  **rket Reports further**  **revealed vacancy rates for Class A office buildings in the Parsippany** 

**- Troy Hills submarket rang**  **ed from 17.11% to**  **30.03% during the tax years at issue. Next,**  **OTR**

**- MCC/Brookwood’s expert**  **reviewed the**  **subject property’s vacancy rates ,**  **concluding that the subject property experienced vacancy rates between**  **17.96 % to 36.10%**  **, with an average of 27.37%,**  **from 2007 to 2018**

**. In OTR** 

**- MCC/Brookwood’s expert’s opinion, the**  **subject property has experienced**  **“unusually high vacancy” rates in the market** 

**. OTR**  **-MCC/Brookwood’s expert**  **then identified a**  **“P eer**  **Group (Competitive Set)**  **” of thirty**  **-one Class A multi** 

**- tenanted office buildings in the**  **Parsippany- Troy Hills office s**  **ubmarket**

**. According to OTR** 

**- MCC/Brookwood’s expert, those buildings**  **reported vacancy rates**  **averag ing**  **: (i) 21.70% for the 2009 tax year**  **; (ii) 25%**  **for the 2010 tax year; (iii) 23.2% for the 2011 tax year; (iv) 23.6%**  **for the 2012 tax year; (v) 23.2% for the 2013 tax year; (vi) 26.7%**  **for the 2014 tax year; (vii) 26.4%**  **for the 2015 tax year; (viii) 25% for the 2016 tax year; (ix) 28.95%**  **for the 2017 tax OTR**  **-MCC, LLC v. Parsippany-Troy Hills Township and**

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **28 year; (x) 32.91% for the 2018 tax year; and (xi) 28.47% for the 2019 tax year.** 
**In arriving at his vacancy and collection loss**  **rates, OTR** 

**- MCC**  **/Brookwood ’s expert**  **particularly focused on**  **the vacancy rates of eight office buildings in the Morris Corporate Center**  **, adjacent to the subject property, including**  **Morris Corporate Center III (400 Interpace Parkway, Buildings A, B, C, & D)**  **and Morris Corporate Center IV**  **(369-379-389- 399 I**  **nterpace Parkway)**

**. T**  **he vacancy rates for those eight**  **buildings ranged from : (i)**  **0% to 88.20%, with a median of 32.4%**  **and mean of 39.34%**  **, for the 2009 tax year; (ii) 0% to 90.3%, with a**  **median of 30.9**  **% and mean of 42.4%**  **, for the 2010 tax year; (iii)**  **0% to 90.3%, with a median of 26.5% and mean of**  **39.2%, for the 2011 tax year; (iv) 0% to 86.5%, with a median of 24.3% and mean of**  **38.6%, for the 2012**  **tax year; (v) 0% to 86.5%, with a median of 24.3% and mean of 38.6%**  **, for the 2013 tax year; (vi)**  **0% to 95.1%, w ith a**  **median of 18.65% and mean of 38.5% ,**  **for the 2014 tax year; (vii) 0% to 95.1%, with a**  **median of 13.8**  **% and mean of 35.1% ,**  **for the 2015 tax year; (viii) 0% to 100%, with** 

**a median of 22.9% and mean of 36.91%**  **, for the 201**  **7 tax year; (**  **ix) 0% to 100%, with a**  **median of 42.4% and mean of 47.36%**  **, for the 2018 tax year;**  **and (x) 0% to 100%, with a median of 12.4%**  **and mean of 31.89%, for the 2019 tax year. 30**  **Finally, OTR** 

**- MCC/Brookwood’s expert**  **testified that he also considered**  **CoStar o**  **ffice**

**r eports for the**  **Pa rsippany-**  **Troy Hills office submarket which includes Boonton, Cedar Knolls,**  **Lake Hiawatha, Montville, Morris Plains, Mountain Lakes, Parsippany, Pine Brook, Towaco, a nd**  **Whippany . According to**  **OTR**

**- MCC/Brookwood’s expert, the CoStar**  **o ffice**  **reports r evealed**  **vacancy rates for all building classes of 14.6%**  **to 25.9% during the tax years at issue.** 

**30 A**  **lthough OTR**

**- MCC/Brookwood’s expert’s report (Exhibits P** 

**- 1(b) and P** 

**- 3)**  **state that the “Peer Group (Competitive Set)” is for the “2010** 

**- 2016 Tax Years,” he include**  **d only six years of data**  **(3 rd**  **Quarters 2009 to 2014) and d**  **id not include the 3**  **rd Quarter 2015 data, which would encompass**  **the 2016 tax year. OTR**  **-MCC, LLC v. Parsippany-Troy Hills Township and**

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **29**
**In OTR**  **-MCC/Brookwood’s expert**  **’s opinion,**  **the Parsippany-**  **Troy Hills office**  **sub market** 

**was “**  **weak ”**  **during all tax years**  **at issue . Therefore, he**  **concluded that a va**  **cancy and collection**  **loss allowance**  **of 25% should be applied to the subject property’s potential gross income for the**  **2009, 2010, 2011, 2012, 2013, 2014, 2015, and 2016 tax years; and a vacancy allowance of**  **30 %**  **should be applied to the subject property’s potential gross income for the 2017, 2018, and 2019 tax years.**  **Similarly, i n arriving at his vacancy and collection loss rates, Parsippany’s expert**  **assembled and analyzed**  **two CoStar building vacancy report**  **s , reviewed the subject p**  **roperty’s rent**  **rolls and “operational history,” including its reported**  **vacancy rates, and consulted**  **Cushman & Wakefield’s Market** 

**b eat Northern New Jersey Office reports.**  **Parsippany’s expert ’s first**  **CoStar building vacancy report examined**  **what he termed as t he**  **“gross inventory” in the Parsippany** 

**- Troy Hills**  **office submarket during each tax year. This report**  **compris ed**  **394 to 409 office buildings**  **in the**  **Parsippany- Troy Hills**  **submarket , composed of**  **all office**  **b uilding classes,**  **and 19,974,530 to 21,749,067 square feet of office space** 

**. According to**  **Parsippany’s expert, t h**  **is report revealed**  **vacancy rates for all**  **office building classes ranged**  **from 15.7% to 22.5% during the tax years at issue.** 
**In Parsippany’s expert’s opinion**  **, “structural changes in the economy” were being**  **experience d**  **due to the 2008 recession, resulting in**  **a conspicuous increase in**  **office building availability and vacancy rates**  **from 2009 to 2013. However,**  **according to Parsippany’s expert, office building avail**  **ability and vacancy rates peaked by mid** 

**- year 2013**  **and ,**  **as market conditions improved,**  **there was a pronounced**  **decline in vacancy rates in the ensuing years**  **because “the market was adjusting.”**  **Parsippany’s expert’s second CoStar building vacancy report examined**  **the vacancy rates OTR**  **-MCC, LLC v. Parsippany-Troy Hills Township and**

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **30 of**  **between 282 to 290 office buildings located within a 3** 

**- mile rad**  **ius of the subject property ,**  **including Parsippany, Morris Plains, portions of Denville, and Mountain Lakes. This report aga in**  **included all office**  **building classes and**  **comprised between 16,322,739 to 17,206,063 square feet**  **of office space. In**  **Parsippany’s expert’s opinion, the 3**

**- mile radius represents the geographical**  **boundaries that a prospective tenant will select in attempting to locate a suitable prop ert**  **y. According to Parsippany’s expert, the second**  **CoStar report revealed vacancy rates**  **within a 3**

**- mile**  **radius of the subject property rang**  **ing from 17.4% to 22.7% during the tax years at issue. Addition**  **ally ,**  **Parsippany’s expert review**  **of the subject proper**  **ty’s rent rolls and**  **“operational history” disclosed that**  **the subject property experienced vacancy rates ranging from**  **16.97% to 36.10%, and averaging 25.47%, from 2008 to 2018. Finally,**  **Parsippany’s expert consulted**  **and analy zed**  **Cushman & Wakefield’s Market b**  **eat Northern New Jersey Office reports**  **. His review of that publication disclos**  **ed that of the**  **approximately 12,187,171 to 13,011,532 square feet of office space in the Parsippany** 

**- Troy Hill**  **s submarket surveyed**  **by Cushman & Wakefield, the direct vacancy rates ranged from 15.6% to** 
**23.9% , and the overall vacancy rates ranged from 20.8% to 28.1% for all office building classes**  **for the 2010 to 2018 tax years. 31**  **Accordingly, in Parsippany’s expert**  **’s opinion, a**  **vacancy and collection loss**  **allowance of**  **15% should be applied to the subject property’s potential gross income for all tax years at i ssue.**  **T he court**  **recognizes that OTR** 

**- MCC/Brookwood’s expert**  **conclu ded**  **that the eight**  **Class**
**A buildings**  **comprising the Morris Corporate Center office park offered**  **the most meaningful** 

**31 According to Parsippany’s expert, the d**  **irect vacancy rate represents office space that was physically**  **vacant and available for lease , and**  **the overall vacancy rate represents occupied office space being marketed for lease**  **at later time. OTR**  **-MCC, LLC v. Parsippany-Troy Hills Township and**

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **31 in**  **sight on the issue of the subject property’s vacancy and collection loss** 

**. However, t**  **he court emphasizes that its**  **own review of th**  **at data discloses**  **notable anomalies exist, r**  **esulting in great**  **variation between the reported vacancy rates for those eight buildings, from 0% to 100%,**  **during the tax years at issue.**  **For example, Morris Corporate Center III -**  **Building A, comprising 114,984 square feet, experienced a vacancy rate of**  **approximately 89% for the 2009, 2010, and 2011 tax years, but thereafter experienced a 0% vacancy rate for the 2012, 2013, 2014, 2015, 2017, 2018,**  **and 2019 tax years. Similarly, the data reveals that Morris Corporate Center III -**  **Building B, comprising 151,950 square feet, experienced a vacancy rate of 0% for the 2009, 2010, 2011, 2012,**  **2013, 2014, 2015, 2017, and 2019 tax years, however reported a 79.8% vacancy rate for the 2018 tax year.**  **Moreover, Morris Corporate Center IV**  **– 369 Interpace Parkway, comprising 188,021**  **square feet, reported vacancy rates of 76.9**  **% to 100%**  **during all tax years at issue. The**  **se wide**  **disparities may be**  **attributable to what Parsippany’s expert**  **explained was the**  **loss of**  **the ir**  **“ target**  **market” tenants,**  **a single,**  **large**

**- scale user of the property. However, t**  **hese wide variations and**  **inconsistencies may also be attributable to other factors such as the**  **disparate age s**  **of the buildings ,**  **the condition of the buildings, or the quality of the**  **management**

**. 32**  **Without an adequate understanding of what role, if any, these factors played in the vacancy rates of the other offic**  **e buildings in the**  **Morris Corporate Center campus**  **, the court cannot say that their vacancy rates offer meaning**  **ful evidence of the subject property’s vacancy and collection loss rates. Accordingly, a**  **fter thoroughly considering the experts’ testimony and reviewing the data presented**  **, t he court concludes that**  **the following stabilized vacancy and collection loss allo wances** 

**32 According to OTR** 

**- MCC/Brookwood’s expert, the subject property was co**  **nstructed in 1986**  **and Morris Corporate Center III, Buildings A, B, C, and D were co**  **nstructed in 1990, four years**  **after the subject property. Conversely, construction of Morris Corporate Center IV was completed**  **in 1999 and 2000, approximately thirteen to fourteen years after the subject property. OTR**  **-MCC, LLC v. Parsippany-Troy Hills Township and**

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **32 should be applied**  **: (i) eighteen (18%) percent**  **, for the 2009 and 2010 tax years**  **; (ii) twenty**

**- two**  **(2 2**  **%) percent**  **, for the 2011, 2012, 2013, 2014, 2015, and 2016 tax years; and (i ii)**  **twenty p ercent**  **(20 %)**  **, for the 2017, 2018, and 2019 tax years. The court finds that the foregoing vacancy and**  **collection loss rates recognize ,**  **as Parsippany’s expert credibly testified, the impact of the 2008 recession and the “structural changes” being experienced in the Parsippany** 

**- Troy Hills office**  **submarket. A**  **s office leases expired**  **in 2009, 2010, and 2011 ,**  **more and more of those**  **spaces often became vacant,**  **correspondingly causing economic and market rents**  **to decline.**  **As our country emerged from the recession, vacancy rates began to decline, and economic and market r**  **ents began to rise.**  **As the graph contained in**  **Parsippany’s expert’s appraisal report**  **demonstrates , vacancy**  **rates in the Parsippany**

**- Troy Hills submarket saw their most pronounced increased from 2010 into**  **2011, peaking in mid**  **-2013 before slowly declining and plateauing in late**  **2016.**

**D. Stabilized expenses**  **Once economic or market rent, potential gross income, tenant**  **reimbursed electricity**  **, and the vacancy and collection loss**  **rates have**  **been determined, the next step under the income capitalization approach is discerning the stabilized expenses to be**  **deducted from**  **the effective gross income.** 
**OTR -MCC/Brookwoo**  **d’s expert and Parsippany’s expert agreed that a stabilized**  **leasing commission**  **expense of 5% of effective gross income**  **was appropriate. The court finds the experts’ opinions that a leasing commission expense of 5% of effective gross income is reasonabl**  **e and supported by the evidence.** 

**1. OTR**  **-MCC/Brookwood’s expert To determine the stabilized operating expenses to be applied to the subject propert**  **y’s effective gross income,**  **OTR**

**- MCC/Brookwood’s expert reviewed the subject property’s historical** **OTR -MCC, LLC v. Parsippany-Troy Hills Township and** 

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **33 operating expenses, building expense data**  **from seve ral comparable**  **office buildings located**  **throughout northern New Jersey ,**  **33 and industry publi**  **cations (Building Owners and Managers**  **Association). 34**  **According to OTR**

**- MCC/Brookwood’s expert, the subject property experienced: (i)**  **insurance expenses of $0.12 to $0.31 per square foot; (ii) utility expenses (net) of $0.00 to $1.54 per square foot; (iii) repair and maintenance expenses of $2.22 to $3.79 per square foot; (iv**  **) cleaning and janitorial expenses of $0.77 to $1.46 per square foot; and (v) general/administr**  **ative expenses of $0.02 to $0.87 per square foot, during all tax years at issue.**  **Moreover, OTR**

**- MCC/Brookwood’s expert’s review of the**  **comparable northern New** 
**J ersey office buildings disclosed: (i) insurance expenses from $0.1**  **0 to $0.55 per square foot; (ii)**  **utility expenses (net) of $0.58 to $ 3.22**  **per square foot; (iii) repair and maintenance expenses of $1.57 to $**  **3.83 per square foot; (iv) cleaning and janitorial expenses of $0.77 to**  **$1.99 per square**  **foot; and (v) general/administrative expenses of $0. 00**  **to $1.29 per square foot, during all tax ye ars**  **at issue. Further, OTR** 

**- MCC/Brookwood’s expert’s review of BOMA’s Experience Exchange**  **Report for the Morristown, New Jersey market disclosed: (i) insurance expense s averaged $0.17**  **to $0.42 per square foot; (ii) utility expenses (gross) averaged $1.47 to $2.77 per square foot; ( iii)**  **repair and maintenance expenses averaged $2.1 7**  **to $3.68 per square foot; (iv) cleaning and janitorial expenses averaged $1.**  **07 to $1.85 per square foot; and (v) general/administrative** 

**33 Approximately twenty-**  **five to twenty -six office buildings.**  **34 The court highlights that although OTR** 

**- MCC/Brookwood’s expert’s appraisal report**  **s summarized what he opined were the average and median expenses reported each year under the**  **BOMA reports, the BOMA reports included in the addendum to the appraisal reports we re**  **illegible. Therefore, the court was unable to independently verify the accuracy and inte grity of the**  **reported information. OTR**  **-MCC, LLC v. Parsippany-Troy Hills Township and**

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **34 expenses averaged $0.**  **66 to $1.32 per square foot, during all tax years at issue. After reviewing the foregoing data,**  **OTR**

**- MCC/Brookwood’s expert concluded that**  **the following stabilized expenses should be applied**  **: (i) a general administrative fee of $0.50 per**  **square foot ; (ii)**  **a management fee of 3% of effective gross income**  **; (iii) a utility expense (net)**  **of $1.00 to $1.50**  **per square foot ; (**  **i v)**  **structural/replacement reserves of 1% of effective gross income**  **; (v) insurance expenses of**  **$0.25 to $0.30 per square foot**  **; (vi) repair and maintenance**  **expenses of $2.75 to $3.00 per square foot; and (vii) c leaning/**  **janitorial expenses of $1.15 to $1.30**  **per square foot, during the tax years at issue.**

**2. Parsippany’s expert**  **To determine his**  **stabilized operating expenses ,**  **Parsippany’s e xpert**  **similarly reviewed the**  **subject property’s historical operating expenses and building expense data from three**  **Class A office buildings within the Parsippany-**  **Troy Hills submarket.**  **According to Parsippany’s expert, the subject property experienced: (i) insurance expenses**  **of $0.00 to $0. 31**  **per square foot; (ii) utility expenses (gross)**  **of $0.00 to $ 4.41**  **per square foot; (iii) repair and maintenance expenses of $**  **1.65 to $**  **8.0 9 per square foot; (iv)**  **management expenses**  **of $0.00**  **to $0. 38**  **per square foot; and (v) general/administrative expenses of $0.03 to $1.21 per square foot**  **, during all tax years at issue. In**  **Parsippany’s expert ’s opinion**  **, the**  **cleaning and janitorial expense**  **should be included under the**  **repair and maintenance category** 

**. Moreover, Parsippany’s expert’s review of the operating expenses of the three**  **Class A office buildings in the Parsippany** 

**- Troy Hills**  **submarket disclosed: (i) insurance expenses from $0.23**  **to $0.42 per square foot; (ii) utility expenses (gross) of $2.4 5 to**  **$3.82 per square foot; (iii) repair and maintenance expenses**  **(gross) of $**  **2.48 to $4.07 per square foot; (**  **i v)** **OTR -MCC, LLC v. Parsippany-Troy Hills Township and** 

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **35 general/administrative expenses**  **(including professional fees) of $0.**  **59 to $**  **0.82 per square foot**  **; 35**  **and (v) management fee expenses of $0.38 to $0.92 per square foot, during all tax years at issue. After reviewing the foregoing data, Parsippany’s expert concluded that: (i) an**  **administration/management fee of 5% of effective gross income; (ii) utility expense s (gross) of**  **$3.00 per square foot; (i**  **ii ) structural/replacement reserves of $0.35 per square foot; (**  **i v) insurance**  **expenses of $0.20 per square foot; and (v) repair and maintenance expenses of $2.50 per square foot should be applied to the subject property’s effective gross income**  **, during a**  **ll tax years at issue.**

**3. Court**  **’s analysis**  **After considering the experts’ testimony and the**  **evidence presented in these matters, and analyzing the subject property’s historical operating expenses, the court finds that the**  **following stabilized expenses should be attributable to the subject property**  **: (i) an**  **insurance expense of $0.21**  **per square foot ; (ii) utility expenses (net**  **of tenant reimbursed**  **electric ity**  **) of $1.50 per square foot; (iii)**  **cleaning and janitorial expenses of $1.25 per square foot ;**  **(iv) repair and maintenance expenses**  **of $2. 25**  **per square foot; (v) management and general administrative expenses of 5% of effective**  **gross income; and (vi) replacement reserves of 1% of effective gross income, dur ing all tax years** 

**. Here, the evidence disclosed**  **that t he subject property**  **has traditionally incurred insurance**  **expenses ranging from $0.13 to $0.31 during the tax years at issue**  **, with an average insurance expense of approximately $0.21 per square foot. Moreover, the court’s examination of the**  **insurance expenses**  **of the comparable buildings within the Parsippany**

**- Troy Hills**  **and Morris County**  **office market identified by OTR** 

**- MCC/Brookwood’s expert,**  **disclose a n insurance** 
**expense range**  **of $0.13**  **to $0. 41**  **, with an average of $0. 22**  **. Accordingly, the court finds that**  **a**

**35 No general/administrative expenses**  **w ere**  **reported for Parsippany’s expert’s comparable**  **office building at 7 Century Drive, Parsippany, New Jersey.** **OTR -MCC, LLC v. Parsippany-Troy Hills Township and** 

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **36 stabilized insurance expense of $0.2**  **1 per square foot**  **is reasonable and**  **supported by the market**  **data. The**  **court highlights that the experts’ re statement**  **of the subject property’s historical utility**  **expenses (net of tenant reimbursed**  **electricity )**  **is disparate. According to OTR**

  ** MCC/Brookwood’s expert, the utility expenses (net of tenant reimbursed** **electric ity**  **) ranged**  **from $0.02 to $**  **1.54 during the tax years at issue, with an average of approximately $0.64 per square**  **foot. Conversely, Parsippany’s expert expressed that the utility expenses (net of tenant**  **reimbursed electric**  **ity ) ranged from $0.21 to $2.91 during the tax years at issue, with an average of**  **approximately $1.87 per square foot.**  **B ecause**  **the court cannot accurately reconcile these disparities**  **, the court places no weight on the subject property’s historical utility expenses. Rather, the court places the greatest weight**  **and emphasis on the utility expenses of the comparable**  **office buildings in the Parsippany** 

**- Troy Hills**  **and Morris County office markets that were**  **identified by the experts**  **. The court’s review of th e**  **data offered by OTR**

**- MCC/Brookwood’s expert**  **discloses**

**a utility**  **expense range (net of**  **$1.50 tenant**  **reimbursed elec**  **tricity ) of $0.58 to $2.12, with an**  **average of $1. 30.**  **Moreover, the court’s review of the data from Parsippany’s expert reveals a**  **utility expense range (net of**  **$1.50 tenant**  **reimbursed electric**  **ity ) of $0.95 to $2.32, with an average**  **of approximately $1. 40**  **per square foot. Moreover, the court’s review of the BOMA national data (averaging all tax years at issue), disclosed an average utility expense of $2.04. Accordi**  **ngly, the court finds that**  **a stabilized utility**  **expense of $1.50 per square foot**  **(net of $1.50**  **tenant reimbursed electric**  **ity ),**  **for all tax years**  **at issue , is reasonable and supported by the market data.**  **The principal difference between the experts’ opinions and calculations of the sta bilized**  **repair and maintenance expense s**  **and cleaning and janitorial expense s**  **centers around whether cleaning and janitorial expense**  **s should be included or excluded from the repair and maintenance** **OTR -MCC, LLC v. Parsippany-Troy Hills Township and** 

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **37**
**expenses. In OTR** 

**- MCC/Brookwood’s expert’s opinion, the cleaning and janitorial expens**  **es should be segregated from the repair and maintenance expense**  **s and afforded its own expense**  **category on the reconstructed operating statement. Conversely, in Parsippany’s expert’s**  **opinion, the stabilized repair and maintenance expenses include “all repairs and maintenance,**  **annual service contracts,**  **[and] ground care costs”**  **associated with the property. Thus, he concluded that cleaning and janitorial services do not need to be afforded a separate stabilized entr**  **y on**  **the reconstructed operating statements.**  **Although the court recognizes that cleaning and janitorial expenses may constitute a subcategory of the larger repair and maintenance expense**  **s categ**  **ory , the court could not identify** 
**any legal precedent or**  **standard that**  **requir es**  **cleaning and janitorial services be included or**  **excluded from the repair and maintenance**  **expenses category** 

**. Rather, the**  **inclusion of cleaning and janitorial expenses under the repair and maintenance expenses category, or the**  **itemization of cleaning and janitorial expenses as a separate expense**  **line item**  **, is**  **purely stylistic.**  **However, the court emphasizes that when cleaning and janitorial expenses are**  **to be itemized separately from**  **repair and maintenance expenses, it is imperative that the appraiser have**  **knowledge about whether the**  **reported repair and maintenance expenses include or exclude**  **the cleaning and janitorial**
**expenses , to ensure that a proper comparison is made between**  **the comparable properties and**  **published market data. Here,**  **t he**  **court’s review of the subject property’s historical**  **income and expense statements, contained in the addendum to OTR** 

**- MCC/Brookwood’s expert’s appraisal reports (pages 60 to**  **106), reveals that the subject property has**  **segregated and historically incurred unr**  **eimbursed cleaning and janitorial expenses.**  **Those cleaning and janitorial**  **expenses ranged**  **fr om $1.02 to**  **$1.46 during the 2008 to 2013 tax years, with an average of approximately $**  **1.27 per square foot**  **; OTR**  **-MCC, LLC v. Parsippany-Troy Hills Township and**

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **38 and ranged from $0.77 to $1.47 during the 2014 to 2018**  **tax years , with an average of**  **approximately $1.18 per square foot. Moreover, the court’s examination of the cleaning and janitorial**  **expenses of the**  **comparable office buildings in the Parsippany**

**- Troy Hills**  **and Morris County office market identified by OTR** 

**- MCC/Brookwood’s expert disclose**  **d a**  **cleaning and janitorial expense**  **range of $0. 6**  **5 to $ 2.03**  **per square foot, with an average of $ 1.33**  **per square foot.**  **After reviewing the foregoing information**  **offered by OTR** 

**- MCC/Brookwood’s expert**  **and Parsippany’s expert**  **, the court finds that m**  **arket data support**  **s the conclusion that a**  **stabilized cleaning and janitorial expense**  **of $1.25 per square foot**  **is reasonable and should be applied for**  **all tax years under appeal.**  **Turning to the larger category of repair and maintenance expenses, t he court’s review of**  **the expense statements for the three comparable Parsippany-**  **Troy Hills office buildings**  **identified by Parsippany’s expert**  **demonstrates maintenance and repair ex**  **penses (net of a $1.**  **2 5 cleaning and**  **janitorial expense) rang ed**  **from $1. 2**  **3 to $2.82**  **per square foot, with an average of $1. 7**  **3 per square foot.**  **36 Conversely,**  **the court’s review of OTR**

**- MCC/Brookwood’s expert’s comparable office**  **buildings in the Parsippany and Morris County markets demonstrates that maintenance and r epair**  **expenses ranged from $1.78 to $4.10 per square foot, with an average of $2.57 per square foot. 37**  **Accordingly, the court finds that a stabilized repair and maintenance expense (net of**  **$1.25 cleaning** 

**36 Because Parsippany’s expert classified cleaning and janitorial expenses as p**  **art of repair and maintenance expenses, it was necessary for the court to deduct from Parsippany’s e**  **xpert’s proffered repair and maintenance expense**  **s the**  **court’s concluded $1.25**  **cleaning and janitorial expenses.**  **37 The court highlights that excluding the 200 Kimball Drive, Parsippany**  **comparable property,**  **whose expenses generally were the highest of those within the Morris County market su rveyed by**  **OTR**

**- MCC/Brookwood’s expert, the a**  **verage repair and maintenance expenses were $2.35 per square foot.** **OTR -MCC, LLC v. Parsippany-Troy Hills Township and** 

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **39 and janitorial expenses) of $2.**  **25 per square foot is reasonable and supported by the market data**  **for all tax years**

**. The principal difference between the experts’ opinion and calculation of management**  **fees centers around whether genera**  **l and administrative expenses**  **should be included in the management fee or segregated from the management fee.**  **In OTR**

**- MCC/Brookwood’s expert’s opinion, general**  **and administrative expenses**  **are separate and distinct from management fees and should be afforde**  **d a separate stabilized expense deduction. Accordingly, OTR**

**- MCC/Brookwood’s expert**  **stabilized general and administrative expense**  **s at**  **$0.50 per square foot and stabilized**  **management fee**  **s at**  **3% of effective gross income** 

**. Conversely, in Parsippany’s expert’s opinion, general and**  **administrative expenses should be included as a subcategory of the management expense s** 
**. Accordingly, Parsippany’s expert deducted management expense**  **s of 5%**  **of effective gross**  **income.**
**OTR**

**- MCC/Brookwood’s expert provided management expenses from several other**  **properties in northern New Jersey. The court’s review of the management expenses of the of fice**  **buildings within the Parsippany** 

**- Troy Hills**  **and Morris County markets disclose a range of management expenses of 2.**  **33% to 3.13 %**  **, with an average management expense of 2.95% of effective gross income**  **, exclu ding**  **administrative expenses**

**. Conversely, Parsippany’s expert**  **offered evidence of**  **management fees from three multi**

**- tenanted Class A buildings in the**  **Parsippany- Troy**  **Hills submarket disclosing management**  **/ administrative/other expenses**  **ranging from**  **$0.95 to $1.36 per square foot, with an average management /administrative/other**  **expense of approximately $1.10 per square foot.**  **Here, the court finds Parsippany’s expert’s testimony more credible and reasonabl e on the**  **issue, that general**  **and administrative costs**  **are incurred and associated with**  **the management and OTR**  **-MCC, LLC v. Parsippany-Troy Hills Township and**

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **40 operation of**  **a Class A multi**

**- tenanted office building**  **in the Parsippany**

**- Troy Hills submarket** 

**. Therefore, they**  **should be encompassed in the stabilized management**  **expenses of the**  **subject property. Accordingly, the court will**  **apply a stabilized management expense**  **of 5% of the effective gross income and will n**  **ot separately itemize**  **a general and administrative expense. Finally, OTR** 

**- MCC/Brookwood’s expert**  **stabilized replacement reserves at**  **1 % of**  **e ffective** 
**g ross**  **i ncome, or**  **, based on his calculated effective gross income,**  **approximately $0. 18**  **to $0.20 per**  **square fo ot.**  **Conversely, Parsippany’s expert stabilized replacement reserves at**  **$0.35 per square foot, or approximately**  **1 .35% to 1.4%**  **of his calculated e**  **ffective g**  **ross income**  **. The court finds**
**OTR**

**- MCC/Brookwood’s testimony more reasonable and credible on this issue. Accordingly,**  **the court will apply a stabilized replacement reserve expense of 1% of effective gross**  **income.**

**E. Tenant improvement allowance** 

**“ In certain real estate markets, space is re**  **nted to a new tenant**  **only after substantial interior improvements**  **are made.” Hull Junction Holding Corp., 16 N.J. Tax at 106 (quoting Appraisal**  **Institute, The Appraisal of Real Estate**  **, 450 (10 th**  **ed. 1992)). When these improvements are incurred at the landlord’s expense and are necessary to realize market rent, th**  **ey are referred to as tenant improvement allowances.**  **The cost of the tenant improvement allowance is often built into the rental rate and amortized by the landlord over the lease term.**  **The Appraisal of Real Estate**  **, at**  **474 (14 th**  **ed. 2013). In the opinion of both experts, tenant improvement allowances are an annually reoccurring**  **expense f or**  **owners of Class A**  **multi**

**- tenanted office buildings in the**  **Parsippany- Troy Hills**  **submarket. Accordingly,**  **each expert calculated a stabilized tenant improvement allowance and deducted such amount from the subject property’s effective gross income.**  **To compute his tenant improvement allowance, OTR** 

**- MCC/Brookwood’s expert**  **examined OTR**  **-MCC, LLC v. Parsippany-Troy Hills Township and**

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **41 the subject property’s new and**  **renewal leases; new and renewal leases for**  **ten comparable properties for the 2009 tax year**  **; new and renewal lease for twenty**  **comparable properties for the**  **2010 to 2016 tax years ; and**  **new and renewal leases for twenty comparable properties for the 2017** 
**to 2019 tax years;**  **market participant surveys; and survey data promulgated by PwC of the National Suburban Office Market** 

**. Significantly, after analyzing the subject property leases and comparable**  **leases, OTR** 

**** **MCC/Brookwood’s expert opined that**  **C lass A office**  **s in the Parsippany**

**- Troy Hills submarket**  **lease for a “typical 84** 

**- month term**  **.” 38**  **Thus, OTR**

**- MCC/Brookwood’s expert concluded that a** 

**seven -**  **year amortization**  **term should be applied in computing the tenant improvement allowance.** 
**OTR**

**- MCC/Brookwood’s expert’s examination**  **disclosed the following range of**  **tenant improvement allowances**  **in the marketplace :**  **Tax years Lease type**  **Subject property Comparable**  **properties Market** 

**participants Korpacz/PwC** 

**2009 New**  **leases $1.00 to $34.14,**  **$ 12.68**  **avg. $15.00 to $36.55,** 

**$24.57 avg. $20.00 to** 

**$30.00 $0.00 to $50.00,** 

**$22.98 avg. Renewal leases**  **$9.54 to $16.00,**

**$12.68 avg. $25.00 to $30.00,** 

**$23.13 avg. $0.00 to** 

**$10.00 $0.00 to $20.00,** 

**$8.50 avg. 2010** 

**- 2016**  **New leases**  **$1.00 to $45.13, $25.06 avg.**  **$20.00 to $66.78,**

**$34.38 avg. $20.00 to** 

**$30.00 $0.00 to $80.00,** 

**$28.93 to $31.96 avg. Renewal leases**  **$0.00 to $45.00,**

**$10.93 avg. $1.93 to $20.00,** 

**$10.66 avg. $0.00 to** 

**$10.00 $0.00 to**  **$25.00,**

**$11.86 to $13.93 avg. 2017** 

**- 2019**  **New leases**  **$5.00 to $55.00, $35.58 avg.**  **$25.00 to $70.16,**

**$46.53 avg. $30.00 to** 

**$50.00 $0.00 to $100.00,** 

**$31.25 to $39.58 avg. Renewal leases**  **$5.00 to $50.00,**

**$17.85 avg. $6.11 to $15.00,** 

**$11.07 avg. $10.00 to** 

**$20.00 $0.00 to $40.00,** 

**$13.57 to $17.92 avg. After reviewing the above information, OTR** 

**- MCC/Brookwood’s expert concluded the**  **following tenant improvement allowances :**  **(i) $30.00 per square foot for new leases and $10.00**

**38 For the 2009 tax year, the**  **comparable new leases average term**  **w ere**  **103 months; and the comparable renewal leases average term**  **were 97 months. For the 2010 to 2016 tax years, the**  **comparable new leases average term were 89 months; and the**  **comparable renewal lease s**  **average term**  **were 67 months. For the 2017 to 2019 tax years, the**  **comparable new leases average term were**  **120 months; and the comparable renewal leases average term were**  **67 months. OTR**  **-MCC, LLC v. Parsippany-Troy Hills Township and**

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **42 per square foot for renewal leases**  **for the 2009 to 2016 tax years; and (ii) $35.00 per square foot for new leases and $15.00 per square foot for renewal leases for the 2017 to 2019 tax years.**  **Next, because a combination of new and existing tenants each receive**  **improvement allowances,**  **OTR -MCC/Brookwood’s**  **expert endeavored to ascertain the probability of lease renewals in the marketplace. He examined PwC surveys of the National Suburban Off**  **ice Market disclosing**  **a renewal probability range**  **of: (i) 65% to 75% for the 2009 tax year; (ii) 50% to**  **70% for the 2010 tax year; (iii) 5**  **0% to 75%**  **for the 2011 to 2016 tax years; (iv) 50% to 75% for the 2017 tax year; and (v) 50% to 70% for the 2017 and 2018 tax years.**  **Accordingly, OTR** 

**** **MCC/Brookwood’s expert assumed**  **a 4**  **0% renewal probability for new lease s and a**  **6 0% renewal**  **probability for existing leases for all tax years at issue.** 
**OTR**

**- MCC/Brookwood’s expert then multiplied his concluded tenant improvement**  **allowance by the renewal probability to determine a weighted average and divided that weighted** 

**avera ge by his concluded**  **seven -**  **year average lease term to determine a stabilized annual tenant**  **improvement allowance. OTR**  **-MCC/Brookwood’s expert’s calculation is as follows:**  **2009 to 2016 tax years Lease type**  **TI Allowance Renewal**  **probability Weighted** 

**average Avg. lease** 

**term Stabilized** 

**allowance New**  **$30.00 psf 40%**  **$12.00 psf 7**  **years $1.71 psf**  **Renewal $10.00 psf**  **60% $6.00 psf**  **7 years**  **$0.86 psf Aaaaaaaaaa**  **aaaaaaaaaaa aaaaaaaaaa**  **aaaaaaaaa TOTAL**  **$2.60 psf 2017 to 2019 tax years**  **Lease type TI**  **Allowance Renewal**  **probability Weighted** 

**average Avg. lease** 

**term Stabilized** 

**allowance New**  **$35.00 psf 40%**  **$14.00 psf 7**  **years $2.00 psf**  **Renewal $15.00 psf**  **60% $9.00 psf**  **7 years**  **$1.29 psf Aaaaaaaaaa**  **aaaaaaaaaaa aaaaaaaaaa**  **aaaaaaaaa TOTAL**  **$3.3 0 PSF** 
**OTR -MCC/Brookwood’s**  **expert then applied his concluded stabilized allowance s to the**  **subject property’s 5 29**  **,3 62**  **square feet of leasable area to compute the following**  **tenant OTR**  **-MCC, LLC v. Parsippany-Troy Hills Township and**

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **43 improvement allowance**  **s: (i) $1,376,341 (529,362**  **x $2.60 psf**  **= $ 1,376,341)**  **for the 2009 to 2016 tax years; and (ii)**  **$1,746,895 (529,362 x $**  **3.30 psf**  **= $ 1,746,895)**  **for the 2017 to 2019 tax years.**
**OTR**

**- MCC/Brookwood’s expert then deducted h**  **is computed tenant improvement allowance from**  **the subject property’s effective gross income for**  **each year under appeal. Similarly, to compute**  **his tenant improvement allowance, Parsippany’s expert**  **examined the subject property’s leases**  **and Class A office lea**  **se work letters for tenant improvement**  **allowances in the Parsippany**

**- Troy Hills**  **office submarket.**  **Based on his examination of the marketplace, Parsippany’s expert concluded that tenant improvement allowances r**  **anged from $10.00 to $15.00 per square foot dur**  **ing the tax years at issue. Ultimately,**  **Parsippany’s expert concluded that a $15.00 per square foot tenant improvement allowance was reasonable for all**  **years under appeal. In addition, in Parsippany’s expert’s opinion, tenant improvements have a**  **ten**

**- year**  **life expectancy and leases generally experience a 75% renewal rate.**  **Accordingly, Parsippany’s expert**  **concluded that a stabilized tenant improvement allowance of $2.50 per square foot should be applied to the subject property’s 5**  **29,362 square feet of**  **leasable area . In sum, Parsippany’s**  **expert deducted a tenant improvement allowance of $1,323,405**  **(529,362 x $2.**  **50 psf =**  **$1,323,405) for each year under appeal.**  **Here, based on the testimony and**  **evidence presente d, the court finds**  **OTR**

  ** MCC/Brookwood’s exper** **t’s supporting market data and formula for discerning a stabilized tenant**  **improvement allowance to be more reliable and credible. However, the court finds t hat**  **OTR**

  ** MCC/Brookwood’s** **expert’s finding that Class A offices in the Parsippany** 

**- Troy Hills submarke**  **t lease for a “typical 84** 

**- month term” is**  **inconsistent with the**  **evidence and market data.**  **As recited above, the court’s review of the subject property leases and**  **the comparable Class A office leases**  **produced by the experts revealed that**  **Class A office lease term s**  **average approximately eight** **OTR -MCC, LLC v. Parsippany-Troy Hills Township and** 

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **44**
**years. Accordingly, in determining the stabilized tenant improvement**  **allowance expense**  **, the court will employ a**  **n eight** 

**- year averag**  **e lease term and amortization period resulting in a $2.**  **25 per square foot tenant improvement allowance for the 2009 to 2016 tax years**  **and a $2.88**  **per square foot tenant improvement allowance for the 2017 to 2019 tax years, computed as follows:**  **2009 to 2016 tax years Lease type**  **TI Allowance Renewal**  **probability W**  **eighted**

**A verage**  **Avg. lease**

**term Stabilized** 

**allowance New**  **$30.00 psf 40%**  **$12.00 psf 8**  **years $1.50 psf**  **Renewal $10.00 psf**  **60% $6.00 psf**  **8 years**  **$0.75 psf Aaaaaaaaaa**  **aaaaaaaaaaa aaaaaaaaaa**  **aaaaaaaaa TOTAL**  **$2.25 psf 2017 to 2019 tax years**  **Lease type TI**  **Allowance Renewal**  **probability Weighted** 

**A verage**  **Avg. lease**

**term Stabilized** 

**allowance New**  **$35.00 psf 40%**  **$14.00 psf 8**  **years $1.75 psf**  **Renewal $15.00 psf**  **60% $9.00 psf**  **8 years**  **$1.13 psf Aaaaaaaaaa**  **aaaaaaaaaaa aaaaaaaaaa**  **aaaaaaaaa TOTAL**  **$2.88 PSF** 
**F. Capitalization Rate**  **The direct capitalization technique is used “to convert an estimate of a single y ear’s income**  **expectancy into an indication of value in one direct step, either by dividing the net income estim ate**  **by an appropriate capitalization rate or by multiplying the income estimate by an a ppropriate**  **factor.” The Appraisal of Real Estate at 491; Hull Junction Holding Corp., 16 N.J. Tax at 80**  **-81. Thus, the capitalization rate is the device that converts a property’s**  **n et**  **o perating**  **i ncome into an** 

**es timate of value.**  **Here, in deriving their capitalization rates,**  **OTR -MCC/Brookwood’s**  **expert and Parsippany’s**  **expert review ed**  **data, including investor surveys and published capitalization rates,**  **however, they primarily relied on**  **the Band of Investment techniq ue.**  **39 The Band of Investment** 

**39 “[T]he Tax Court has accepted, and the Supreme Court has sanctioned, the use of data coll**  **ected and published by the American Council of Life Insurance.” Hull Junction Holding Corp., 16 N.J.** **OTR -MCC, LLC v. Parsippany-Troy Hills Township and** 

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **45 technique “is a form of ‘direct capitalization’ which is used ‘to convert a single ye**  **ar’s income estimate into a value indication.’ The technique includes both a mortgage and an equity**  **component.” Hull Junction Holding Corp., 16 N.J. Tax. at 80**

**- 81 (quoti**  **ng Appraisal Institute, The**  **Appraisal of Real Estate , 467 (10**  **th ed 1992)). When employing the “Band of Investment**  **technique, it is incumbent upon the appraiser to support the various components of the capitalization rate analysis by furnishing ‘reliable m**  **arket data . . . to the court as the basis for the expert’s opinion so that the court may evaluate the opinion.’”**  **Id. at 82 (quoting**  **Glen Wall Assocs. ,**  **99 N.J. 265, 279-80 (1985)).**
**OTR -MCC/Brookwood’s**  **expert consulted Korpacz /PwC**  **National Suburban Office investor surveys,**  **Viewpoint National Suburban Office investor surveys, A**  **merican Council of Life Insurers (“ACLI”) Investment Bulletins**  **, 40**  **NKF Financing Rate surveys, Integra Realty Resources Financing Rate surveys**  **, and RealtyRates.com**  **investor surveys to derive his mortgage interest rates, loan** 

**- to**  **-value ratios, amortization terms, and equity dividend rates. 41**  **Similarly, Parsippany**  **’s expert consulted Korpacz/PwC National Suburban Office investor** 
**surveys (including the Korpacz Dividend Indicator and PwC Yield**  **Indicator) , A**  **merican Council of Life Insurers (“ACLI”) Investment Bulletins**  **, and RealtyRates.com investor surveys**  **to derive his mortgage interest rates, loan-**  **to -value ratios, amortization terms, and equity dividend rates.** 

**Tax at 82-**  **83. “Relevant data is also collected and published by . . . Korpacz [PWC] Real Estate Investor Survey.”**  **Id. at 83. By scrutinizing and “analyzing this data**  **in toto , the court can make a**  **reasoned determination as to the accuracy and reliability of the mortgage interest rates, mortgage**  **constants, loan- to**  **-value ratios, and equity dividend rates used by the appraisers.” Ibid. 40**  **The ACLI Bulletins reproduced by OTR**

**- MCC/Brookwood’s expert and contained in the**  **Addendum to his appraisal reports were barely**  **le gible.**  **41 OTR** 

**- MCC/Brookwood’s expert relied on the Viewpoint National Suburban Office investor**  **surveys for only the 2010 to 2016 tax years, NKF Financing Rate surveys only for the 2009 tax year, and Integra Realty Resources Financing Rate surveys only for the 2010 to 2016 tax years** 

**. OTR**  **-MCC, LLC v. Parsippany-Troy Hills Township and**

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **46 The following chart**  **s detail the B**  **and of Investment components and the concluded capitalization rates of**  **the experts:**

**10/1/2008 10/1/2009**  **10/1/201 0**  **10/1/201 1**  **10/1/201 2**  **10/1/201 3**  **OTR**

**- MCC**  **/ Brookwood’s**  **expert Int.:**  **7. 50**  **%**

**LTV: 60% Amort.:**  **30 yr**  **Eq. div**

**. :**  **10% CAP:**  **9. 00**  **% Int.:**  **7. 50**  **%**

**LTV: 60%**  **Amort.: 30**  **yr Eq. div.: 1**  **0% CAP:**  **9. 00**  **% Int.:**  **5.0 0%** 

**LTV: 55**  **% Amort.:**  **30 yr**  **Eq. div.: 1 0%**  **CAP: 8. 00**  **% Int.:**  **4 .5**  **0%**

**LTV: 60% Amort.:**  **30 yr**  **Eq. div.: 1 2%**  **CAP: 8**  **.50% Int.:**  **4. 00**  **%**

**LTV: 55**  **% Amort.: 25 yr**  **Eq. div.: 1 1%**  **CAP: 8.**  **00 %**  **Int.: 4. 50**  **%**

**LTV: 55**  **% Amort.:**  **30 yr**  **Eq. div.: 1 1%**  **CAP: 8.2**  **5% Parsippany**  **’s expert**  **Int.: 7.**  **00 %** 

**LTV: 70**  **% Amort.: 25 yr**  **Eq. div.: 7% CAP:**  **8. 04**  **% Int.:**  **7 .0**  **0%**

**LTV: 7 0%**  **Amort.: 25 yr Eq. div.:**  **8% CAP:**  **8. 34**  **% Int.:**  **5. 25**  **%**

**LTV: 75% Amort.: 25 yr**  **Eq. div.: 8%**  **CAP: 7.**  **39 %**  **Int.: 5.**  **00 %** 

**LTV: 75% Amort.: 25 yr**  **Eq. div.: 7 .5**  **% CAP:**  **7. 15**  **% Int.:**  **5. 00**  **%**

**LTV: 75% Amort.: 25 yr**  **Eq. div.: 7% CAP:**  **7. 02**  **% Int.:**  **5 .50%** 

**LTV: 75% Amort.: 25 yr**  **Eq. div.: 7 .25**  **% CAP:**  **7. 34**  **%**
**10/1/2014 10/1/2015**  **10/1/201 6**  **10/1/201 7**  **10/1/201 8**  **OTR**

**- MCC/**  **Brookwood’s expert**  **Int.: 4.00%** 

**LTV: 55**  **% Amort.:**  **30 yr**  **Eq. div.: 1 1%**  **CAP: 8.**  **00 %**  **Int.: 4.00%** 

**LTV: 55**  **% Amort.:**  **30 yr**  **Eq. div.: 1 1%**  **CAP: 8.**  **00 %**  **Int.: 4.0**  **0%**

**LTV: 55**  **% Amort.:**  **30 yr**  **Eq. div.: 1 1%**  **CAP: 8. 00**  **% Int.:**  **4.00%**

**LTV: 55**  **% Amort.:**  **30 yr**  **Eq. div.: 1 1%**  **CAP: 8.0**  **0% Int.:**  **4. 00**  **%**

**LTV: 55**  **% Amort.:**  **30 yr**  **Eq. div.: 1 1%**  **CAP: 8.**  **00 %**  **Parsippany ’s**  **expert Int.:**  **5 .25%** 

**LTV: 70**  **% Amort.: 25 yr**  **Eq. div.: 7 .25**  **% CAP:**  **7. 21**  **% Int.:**  **5. 25**  **%**

**LTV: 7 0%**  **Amort.: 25 yr Eq. div.: 7%**  **CAP: 7.**  **13 %**  **Int.: 5.0**  **0%**

**LTV: 7 0%**  **Amort.: 25 yr Eq. div.:**  **6.5 %**  **CAP: 6. 86**  **% Int.:**  **5. 00**  **%**

**LTV: 7 0%**  **Amort.: 25 yr Eq. div.:**  **6.5 %**  **CAP: 6.8 6%**  **Int.: 5.**  **00 %** 

**LTV: 7 0%**  **Amort.: 25 yr Eq. div.:**  **6.5 %**  **CAP: 6.8 6%**  **At the outset, the court emphasizes that the PwC investor surveys**  **and the capitalization rate information contained therein**  **are not based on actual sale transactions. Rather, they represent**  **the opinions of investors, in national and select regional markets, regarding t heir investment**  **expectations for hypothetical transactions. As**  **succinctly stated in**  **The Appraisal of Real Estate**  **,**

**w hen developing a capitalization rate, published s**  **urveys are an adequate source of “ support rather**  **than as primary evidence of a capitalization rate. ”**  **Id. at**  **466 (emphasis added).**  **Accordingly, the** 
**court accords the investor surveys little weight in attempting to discern the capitalization**  **rates to be applied to the subject property.**  **Rather, the court concludes that**  **the Band of Investment technique provides the most accurate and reliable method of derivi**  **ng a capitalization rate because it is not polluted or impacted OTR**  **-MCC, LLC v. Parsippany-Troy Hills Township and**

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **47 by questions of how potential survey recipient**  **s perceived hypothetical transactional question**  **s or**  **how a market perceives an annually**  **re occurring operating expense.** 
**T he court’s analysis of the ACLI tables for fixed rate mortgages for office buil**  **dings disclosed that during the tax years at issue mortgage interest rates ranged from**  **3.54% to 7.15% 42** 
**and loan**

**- to** 

**- value ratios ranged from 53.13% to 64.2%.**  **In addition, the court’s analysis of the ACLI tables**  **for fixed rate commercial mortgages in**  **the Middle Atlantic region, and more**  **specifically, New Jersey**  **, similarly**  **disclosed that**  **during the tax years at issue mortgage interest**  **rates ranged from 3.66**  **% to 7.87%**  **43 and**  **loan**

**- to** 

**- value ratios rang**  **ed from**  **56.7% to 64.9%**

**. 44**  **Moreover, a s recited above, the court finds Parsippany’s expert’s characterization of the su**  **bject property as one of “the finest campus[es] that Parsippany has” to offer and one of**  **the premier Class A office**  **buildings in the Parsippany- Troy Hills marketplace**  **to be accurate . Thus, the court**  **finds that the subject property’s caliber would place it**  **in the**  **lowe r**  **range of the mortgage interest** 
**rate s**  **and would place it in the highe**  **r range of the loan** 

**- to** 

**- value ra**  **tios**

**. Accordingly, based on the**  **experts’ testimony and the court’s review of the above information, the court conclude s that**  **the following interest rates and loan-**  **to**

**- value ratios**  **should apply to the subject property:**

**2009 2010**  **2011 2012**  **2013 Interest**  **rate 6.875%**  **6.875% 5.00%**  **5.00% 4.25%**  **Loan**

**- to** 

**- value ratio**  **65% 65%.**  **65% 65%**  **65%**

**2014 2015**  **2016 2017**  **2018 2019**  **Interest rate 4.25%**  **4.125% 4.**  **125 %**  **4.0% 4.0%**  **4.0% Loan** 

**- to** 

**- value ratio**  **65% 65%**  **65% 65%**  **65% 65%** 

**42 (i) 6.32% to 7.15%, from 2009 to 2010; (ii) 4.60% to 5.04%, from 2011 to 2012; (iii) 3.91**  **% to 4.25%, from 2013 to 2016; and (iv) 3.54% to 4.33%, from 2017 to 2019.**  **43 (i) 6.00% to 7.87%, from 2009 to 2010; (ii) 5.02% to 5.46%, from 2011 to 2012; (iii) 3.66% to**  **4.52%, from 2013 to 2016; and (iv) 3.49% to 4.00%, from 2017 to 2019. 44**  **OTR**

**- MCC/Brookwood’s expert’s appraisal reports state that the NKF Financing Rat**  **e Survey is**  **“included in addendum D on pages 188**

**- 194.” However, the court’s review of pages 188**  **-194 of the addendum disclosed Korpacz/PwC National Suburban Office Market publications.** **OTR -MCC, LLC v. Parsippany-Troy Hills Township and** 

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **48 In addition, given the subject property’s character, quality, and**  **s itus in the Parsippany** 

**** **Troy Hills Class A office submarket, the court finds that Parsippany’s expert’s a pplication of a 25** 

**- year loan amortization term is more credible and reasonable.**  **Finally, the court finds that the 10% and 11% equity dividend rates proposed by**  **OTR**

  ** MCC/Brookwood’s exp** **ert we**  **re not aligned with the reasonable investment expectations of investors in**  **Class A multi** 

**- tenanted office buildings**  **during the tax years at issue**

**. The court**  **emphasizes that the RealtyRates.com equity rates relied on , in**  **part, by**  **OTR -MCC/Brookwood’s**  **expert to generate his equity dividend rates contain no property classification detail or geographical**  **reference. Thus, the reported equity dividend rates could be generated entirely from owner s of**  **Class B, C, or D buildings in Florida.**  **Accordingly, the court does not find the RealtyRates.com equity dividend rates probative and**  **credible evidence of equity dividend rates for**  **a multi**

**- tenanted**  **Class A office building in northern New Jersey. Here, the court’s review of**  **the Kor pacz/PwC Dividend Indicator discloses**  **dividend rates**  **ranging from 6.13% to 8.49% during the tax years at issue. Moreover, the m arket data disclose**  **d that United States**  **10- year treasury bonds during the tax years at issue**  **yielded 1.63 % to 3.**  **77 %.**  **Moreover, Equity REIT’s reported dividend yields of 3.53**  **% to 5.09**  **% during the tax years at issue.**  **45 In addition,**  **OTR**

**- MCC/Brookwood’s expert’s**  **Viewpoint National Suburban Office**  **investor surveys disclosed rates**  **ranging from 8.30%**  **to 8.76% for the 2013 through 2015 tax years** 

**. Accordingly, based on the court’s review of the**  **alternate investment data offered by the**  **experts, the yield rates for United States 10-**  **year treasury bonds, the Viewpoint National Suburban Office investor surveys, and the Equity REIT’s dividend yields, the court concludes that** 

**45 As reported in the PwC Real Estate Investor Surveys**  **relied on by both experts a**  **nd which identified**  **the National Association of Real Estate Investment Trusts as the data sourc e.** **OTR -MCC, LLC v. Parsippany-Troy Hills Township and** 

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **49 Parsippany’s**  **expert’s proposed equity dividend rates, as modified below, are more**  **closely aligned with the reasonable expectations of i**  **nvestors during the tax years at issue** 

**. Therefore, the court**  **will apply the following equity dividend rates to the subject property:** 

**2009 2010**  **2011 2012**  **2013 2014**  **2015 2016**  **2017 2018**  **2019 7.**  **50 %**  **7. 50**  **% 8.**  **00 %**  **8. 00**  **% 7.50%**  **7.50% 7.**  **25 %**  **7. 25**  **% 7.00%**  **7.00% 7.00%**  **Thus, using the Band of Investment technique, the base**  **capitalization rate s**  **would be calculated as follows**  **: 2009 to 2010 2011 to 2012**  **I nterest rate**  **6.875 %**  **Interest rate 5.00**  **% Amortization period**  **25 years Amortization period**  **25 years Mortgage constant 8.386 Mortgage constant 7.015**  **Mortgage component 65% x 8.386 = 5.451 Mortgage component 65% x 7.015 = 4.559 Equity divided rate 7.50% Equity divided rate 8.00%**  **Equity component 35% x 7.50 = 2.625 Equity component 35% x 8.00 = 2.80 Base Capitalization Rate**  **8.08% Base Capitalization Rate**  **7.36%**
**2013 to 2014 2015 to 2016 Interest rate**  **4.25% Interest rate**  **4.125 %**  **Amortization period 25 years**  **Amortization period 25 years**  **Mortgage constant 6.501 Mortgage constant 6.417 Mortgage component 65% x 6.501 = 4.226 Mortgage component 65% x 6.417 = 4.171**  **Equity divided rate 7.50% Equity divided rate 7.25% Equity component 35% x 7.50 = 2.625 Equity component 35% x 7.25 = 2.537**  **Base Capitalization Rate 6.85%**  **Base Capitalization Rate 6.71%** 
**2017 to 2019 Interest rate**  **4.00 %**  **Amortization period 25 years**  **Mortgage constant 6.334 Mortgage component 65% x 6.334 = 4.117**  **Equity divided rate 7.00% Equity component 35% x 7.00 = 2.45**  **Base Capitalization Rate 6.57%**  **However, after determining the base capitalization rate, a tax factor must be “load ed” or**  **added to each**  **base capitalization rate to derive**  **an overall capitalization rate.**  **The tax factor represents the real estate taxes payable**  **by OTR -MCC/Brookwood.** **OTR -MCC, LLC v. Parsippany-Troy Hills Township and** 

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **50 Both experts concluded that the effective tax rate that should be applied to the base**  **capitalization rate was: (i) 1.809% for the 2009 tax year; (ii) 1.914% for the 2010 tax year; (i ii)**  **2.012% for the 2011 tax year; (iv) 2.095% for the 2012 tax year; (v) 2.261% for the 2013 tax year;**  **(vi) 2.298% for the 2014 tax year; (vii) 2.315% for the 2015 tax year; (viii) 2.374% for the 2016 tax year; (ix) 2.385% for the 2017 tax year; (x) 2.456% for the 2018 tax year; and (xi) 2.533% for**  **the 2 019 tax year.**  **Accordingly, for the reasons set forth above and employing the income** 

**- capitalization**  **approach, the court finds the true or fair market value of the subject property to be as f ollows:** 

2 009 Tax Year
**INCOME :**  **Office $2**  **8. 00**  **PSF @ 529,362 sq.**  **ft. $**  **14,822,136 TOTAL:**  **POTENTIAL GROSS INCOME $**  **14,822,136 LESS:**  **Vacancy & Collection Loss @**  **18 % PGI**  **($ 2,**  **6 67,984**  **) TOTAL:**  **EFFECTIVE GROSS INCOME $**  **12,154,152**
**STABILIZED EXPENSES :**  **Insurance @**  **$0.2 1**  **x 529,362**  **sq. ft. $**  **1 11,166**  **Utilities (net)**  **@ $1.5**  **0 x 529,362 sq. ft.**  **$ 794,043**  **Repair s**  **& Maintenance @**  **$2. 25**  **x 529,362 sq. ft. $**  **1, 1**  **91,065 Cleaning/Janitorial**  **@ $1. 25**  **x 529,362 sq. ft. $**  **661,703 Management** 

**/General/Admin. @**  **5 % of EGI**  **$ 607,708**  **Replacement Reserves @**  **1 % of EGI**  **$ 121,**  **542 Leasing Commissions**  **@ 5% of EGI $**  **6 07,708**  **Tenant Imp. Allowance @ $**  **2.25 x**  **529,362 sq. ft.**  **$ 1,191,065**  **TOTAL: STABILIZED EXPENSES ($**  **5, 2**  **86 ,**  **000 )** 
**NET OPERATING INCOME**  **$ 6,868,152**  **Base Capitalization Rate: 8.**  **08 %**  **Plus: Effective Tax Rate: 1.8**  **1% TOTAL CAPITALIZATION RATE:**  **9.89 %** 
**INDICATED VALUE: $**  **69,445,420** CONCLUDED VALUE: $ 69 ,4 00,000**OTR -MCC, LLC v. Parsippany-Troy Hills Township and** 

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **51**
2010 Tax Year
**INCOME :**  **Office $28.**  **00 PSF**  **@ 529,362 sq. ft. $14,822,136**  **TOTAL: POTENTIAL GROSS INCOME**  **$14,822,136 LESS:**  **Vacancy & Collection Loss @**  **18% PGI ($**  **2, 667,984**  **) TOTAL:**  **EFFECTIVE GROSS INCOME $12,154,152** 
**STABILIZED EXPENSES :**  **Insurance @**  **$0.2 1**  **x 529,362 sq. ft. $ 1**  **11,166 Utilities (net)**  **@ $1.50 x 529,362 sq. ft. $ 794,043**  **Repairs & Maintenance @ $2.**  **25 x 529,362 sq. ft.**  **$1,191,065 Cleaning/Janitorial**  **@ $1.25 x 529,362 sq. ft. $ 661,703**  **Management/General/Admin. @ 5% of EGI**  **$ 607,708**  **Replacement Reserves @ 1% of EGI**  **$ 12 1,542**  **Leasing Commissions @ 5% of EGI**  **$ 6 07,708**  **Tenant Imp. Allowance @ $2.25 x 529,362 sq. ft.**  **$1,191,065 TOTAL: STABILIZED EXPENSES**  **($ 5,**  **286,000 )** 
**NET OPERATING INCOME $**  **6,868,152 Base Capitalization Rate:**  **8.08% Plus: Effective Tax Rate:**  **1. 914%**  **TOTAL CAPITALIZATION RATE: 9.99**  **%**
**INDICATED VALUE: $**  **68,750,270** CONCLUDED VALUE: $68,8 00,000
2011 Tax Year
**INCOME :**  **Office $2**  **6. 25**  **PSF @ 529,362 sq. ft.**  **$1 3,895,753**  **TOTAL: POTENTIAL GROSS INCOME**  **$13,895,753 LESS:**  **Vacancy & Collection Loss @**  **22 % PGI**  **($ 3,**  **057,066) TOTAL:**  **EFFECTIVE GROSS INCOME $1**  **0, 838,687** 
**STABILIZED EXPENSES :**  **Insurance @ $0.2**  **1 x 529,362 sq. ft.**  **$ 111,166**  **Utilities (net) @ $1.50 x 529,362 sq. ft.**  **$ 794,043 Repairs & Maintenance**  **@ $2. 25**  **x 529,362 sq. ft. $**  **1,1 91,065**  **Cleaning/Janitorial @ $1.25 x 529,362 sq. ft.**  **$ 661,703 Management/General/Admin.**  **@ 5% of EGI $**  **54 1,**  **934 Replacement Reserves**  **@ 1% of EGI $**  **1 08,387**  **Leasing Commissions @ 5% of EGI**  **$ 541,**  **93 4**  **Tenant Imp. Allowance @ $2.25 x 529,362 sq. ft.**  **$1,191,065 TOTAL: STABILIZED**  **EXPENSES ($**  **5, 1**  **41 ,**  **297 )** 
**NET OPERATING INCOME $ 5,**  **697,390 Base Capitalization Rate:**  **7.36 Plus: Effective Tax Rate:**  **2.012% TOTAL CAPITALIZATION RATE:**  **9.37 %** 
**INDICATED VALUE: $60,**  **804,589** CONCLUDED VALUE: $60,8 00,000**OTR -MCC, LLC v. Parsippany-Troy Hills Township and** 

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **52**
2012 Tax Year
**INCOME :**  **Office $26.25 PSF**  **@ 529,362 sq. ft. $13,895,753**  **TOTAL: POTENTIAL GROSS INCOME**  **$13,895,753 LESS:**  **Vacancy & Collection Loss @ 22% PGI**  **($ 3,057,066) TOTAL:**  **EFFECTIVE GROSS INCOME $10,838,687** 
**STABILIZED EXPENSES :**  **Insurance @ $0.21 x 529,362 sq. ft.**  **$ 111,166 Utilities (net)**  **@ $1.50 x 529,362 sq. ft. $ 794,043**  **Repairs & Maintenance @ $2.25 x 529,362 sq. ft.**  **$1,191,065 Cleaning/Janitorial**  **@ $1.25 x 529,362 sq. ft. $ 661,703**  **Management/General/Admin. @ 5% of EGI**  **$ 541,934 Replacement Reserves**  **@ 1% of EGI $ 108,387**  **Leasing Commissions @ 5% of EGI**  **$ 541,934 Tenant Imp. Allowance**  **@ $2.25 x 529,362 sq. ft. $1,191,065**  **TOTAL: STABILIZED EXPENSES (**  **$ 5,141,297 )** 
**NET OPERATING INCOME $ 5,697,390**  **Base Capitalization Rate: 7.36**  **% Plus: Effective Tax Rate:**  **2.095% TOTAL CAPITALIZATION RATE:**  **9.46 %** 
**INDICATED VALU E:**  **$6 0,226,110**  CONCLUDED VALUE: $60,2 00,000
2013 Tax Year
**INCOME :**  **Office $26.25 PSF**  **@ 529,362 sq. ft. $13,895,753**  **TOTAL: POTENTIAL GROSS INCOME**  **$13,895,753 LESS:**  **Vacancy & Collection Loss @ 22% PGI**  **($ 3,057,066) TOTAL:**  **EFFECTIVE GROSS INCOME $10,838,687** 
**STABILIZED EXPENSES :**  **Insurance @ $0.21 x 529,362 sq. ft.**  **$ 111,166 Utilities (net)**  **@ $1.50 x 529,362 sq. ft. $ 794,043**  **Repairs & Maintenance @ $2.25 x 529,362 sq. ft.**  **$1,191,065 Cleaning/Janitorial**  **@ $1.25 x 529,362 sq. ft. $ 661,703**  **Management/General/Admin. @ 5% of EGI**  **$ 541,934 Replacement Reserves**  **@ 1% of EGI $ 108,387**  **Leasing Commissions @ 5% of EGI**  **$ 541,934 Tenant Imp.**  **Allowance @ $2.25 x 529,362 sq. ft.**  **$1,191,065 TOTAL: STABILIZED EXPENSES**  **( $ 5,141,297**  **)**
**NET OPERATING INCOME $ 5,697,390**  **Base Capitalization Rate: 6.85%**  **Plus: Effective Tax Rate: 2.261**  **% TOTAL CAP**  **ITALIZATION RATE: 9.**  **11%**
**INDICATED VALUE: $6**  **2,539,956** CONCLUDED VALUE: $6 2,5 00,000**OTR -MCC, LLC v. Parsippany-Troy Hills Township and** 

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **53**
2014 Tax Year
**INCOME :**  **Office $27.**  **25 PSF**  **@ 529,362 sq. ft. $14,425,115**  **TOTAL: POTENTIAL GROSS INCOME**  **$14,425,115 LESS:**  **Vacancy & Collection Loss @ 2**  **2 % PGI**  **($ 3,**  **173,525 )**  **TOTAL: EFFECTIVE GROSS INCOME**  **$11,251,590**
**STABILIZED EXPENSES :**  **Insurance @ $0.21 x 529,362 sq. ft.**  **$ 111,166 Utilities (net)**  **@ $1.50 x 529,362 sq. ft. $**  **794,043 Repairs & Maintenance**  **@ $2.25 x 529,362 sq. ft. $1,191,065**  **Cleaning/Janitorial @ $1.25 x 529,362 sq. ft.**  **$ 661,703 Management/General/Admin.**  **@ 5% of EGI $ 5**  **62,580 Replacement Reserves**  **@ 1% of EGI $ 11**  **2, 516**  **Leasing Commissions @ 5% o**  **f EGI $ 5**  **62 ,**  **580 Tenant Imp. Allowance**  **@ $2.25 x 529,362 sq. ft. $1,191,065**  **TOTAL: STABILIZED EXPENSES (**  **$ 5, 186,718**  **)**
**NET OPERATING INCOME $**  **6, 064,872**  **Base Capitalization Rate: 6.**  **85% Plus: Effective Tax Rate:**  **2.298% TOTAL CAPITALIZATION RATE:**  **9. 15%** 
**INDICATED VALUE: $66,282,754**  CONCLUDED VALUE: $6 6,3 00,000
2015 Tax Year
**INCOME :**  **Office $27.25 PSF**  **@ 529,362 sq. ft. $14,425,115**  **TOTAL: POTENTIAL GROSS INCOME**  **$14,425,115 LESS:**  **Vacancy & Collection Loss @ 2**  **2 % PGI**  **($ 3,**  **173,525 )**  **TOTAL: EFFECTIVE GROSS INCOME**  **$11,251,590**
**STABILIZED EXPENSES :**  **Insurance @ $0.21 x 529,362 sq. ft** 

**. $ 111,166**  **Utilities (net) @ $1.50 x 529,362 sq. ft.**  **$ 794,043 Repairs & Maintenance**  **@ $2.25 x 529,362 sq. ft. $1,191,065**  **Cleaning/Janitorial @ $1.25 x 529,362 sq. ft.**  **$ 661,703 Management/General/Admin.**  **@ 5% of EGI $ 5**  **62,580 Replacement**  **Reserves @ 1% of EGI**  **$ 11 2,**  **516 Leasing Commissions**  **@ 5% of EGI $ 5**  **62 ,**  **580 Tenant Imp. Allowance**  **@ $2.25 x 529,362 sq. ft. $1,191,065**  **TOTAL: STABILIZED EXPENSES (**  **$ 5, 186,718**  **)**
**NET OPERATING INCOME**  **$ 6, 064,872**  **Base Capitalization Rate: 6.71**  **% Plus: Effective Tax Rate:**  **2.315% TOTAL CAPITALIZATION RATE:**  **9.03 %** 
**INDICATED VALUE: $**  **67,163,588** CONCLUDED VALUE: $ 67 ,2 00,000**OTR -MCC, LLC v. Parsippany-Troy Hills Township and** 

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **54**
2016 Tax Year
**INCOME :**  **Office $27.25 PSF**  **@ 529,362 sq. ft.**  **$14,425,115 TOTAL:**  **POTENTIAL GROSS INCOME $14,425,115**  **LESS: Vacancy & Collection Loss**  **@ 2 2**  **% PGI ($**  **3, 173,525**  **) TOTAL:**  **EFFECTIVE GROSS INCOME $11,251,590** 
**STABILIZED EXPENSES :**  **Insurance @ $0**  **.21 x 529,362 sq. ft. $ 111,166**  **Utilities (net) @ $1.50 x 529,362 sq. ft.**  **$ 794,043 Repairs & Maintenance**  **@ $2.25 x 529,362 sq. ft. $1,191,065**  **Cleaning/Janitorial @ $1.25 x 529,362 sq. ft.**  **$ 661,703 Management/General/Admin.**  **@ 5% of EGI $**  **5 62,580**  **Replacement Reserves @ 1% of EGI**  **$ 11 2,**  **516 Leasing Commissions**  **@ 5% of EGI $ 5**  **62 ,**  **580 Tenant Imp. Allowance**  **@ $2.25 x 529,362 sq. ft. $1,191,065**  **TOTAL: STABILIZED EXPENSES (**  **$ 5, 186,718**  **)**
**NET OPERATING INCOME $ 6,**  **064,872 Base Capitalization Rate:**  **6.71 %**  **Plus: Effective Tax Rate: 2.374%**  **TOTAL CAPITALIZATION RATE: 9.08**  **%**
**INDICATED VALUE: $66,793,745**  CONCLUDED VALUE: $6 6,8 00,000
2017 Tax Year
**INCOME :**  **Office $2**  **7.00 PSF**  **@ 529,362 sq. ft. $14,292,774**  **TOTAL: POTENTIAL GROSS INCOME**  **$14, 292**  **, 774**  **LESS: Vacancy & Collection Loss**  **@ 20**  **% PGI**  **($ 2,**  **858,555 )**  **TOTAL: EFFECTIVE GROSS INCOME**  **$11,434,219**
**STABILIZED EXPENSES :**  **Insurance @ $0.21 x 529,362 sq. ft.**  **$ 111,166 Utilities (net)**  **@ $1.50 x 529,362 sq. ft. $ 794,043**  **Repairs & Maintenance @ $2.2**  **5 x 529,362 sq. ft.**  **$1,1 91**  **, 065**  **Cleaning/Janitorial @ $1.25 x 529,362 sq. ft.**  **$ 661,703 Management/General/Admin.**  **@ 5% of EGI $ 5**  **71 ,7**  **11 Replacement Reserves**  **@ 1% of EGI $ 11**  **4,342 Leasing Commissions**  **@ 5% of EGI $ 5**  **71 ,7**  **11 Tenant Imp. Allowance**  **@ $2.88 x 529,362 sq. ft. $1,524,563**  **TOTAL: STABILIZED EXPENSES (**  **$ 5, 5**  **40 ,**  **304 )** 
**NET OPERATING INCOME $**  **5,893,915 Base Capitalization Rate:**  **6. 57**  **% Plus: Effective Tax Rate:**  **2.3 85**  **% TOTAL CAPITALIZATION RATE:**  **8. 96**  **%**
**INDICATED VALUE: $6**  **5, 780,301**  CONCLUDED VALUE: $6 5,80 0,000**OTR -MCC, LLC v. Parsippany-Troy Hills Township and** 

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **55**
2018 Tax Year
**INCOME :**  **Office $27.00 PSF**  **@ 529,362 sq. ft. $14,292,774**  **TOTAL: POTENTIAL GROSS INCOME**  **$14,292,774 LESS:**  **Vacancy & Collection Loss @**  **20 % PGI**  **($ 2, 858,555**  **) TOTAL:**  **EFFECTIVE GROSS INCOME $11,434,219** 
**STABILIZED EXPENSES :**  **Insurance @ $0.21 x 529,362 sq. ft.**  **$ 111,166 Utilities (net)**  **@ $1.50 x 529,362 sq. ft. $ 794,043**  **Repairs & Maintenance @ $2.25 x 529,362 sq. ft.**  **$1,191,065 Cleaning/Janitorial**  **@ $1.25 x 529,362 sq. ft. $**  **661,703 Management/General/Admin.**  **@ 5% of EGI $ 57**  **1 ,7**  **11 Replacement Reserves**  **@ 1% of EGI $ 11**  **4,342 Leasing Commissions**  **@ 5% of EGI $ 57**  **1 ,7**  **11 Tenant Imp. Allowance**  **@ $2.88 x 529,362 sq. ft. $1,524,563**  **TOTAL: STABILIZED EXPENSES (**  **$ 5,5 40**  **, 304**  **)**
**NET OPERATING INCOME $**  **5,893,915 Base Capitalization Rate:**  **6. 57**  **% Plus: Effective Tax Rate:**  **2.456% TOTAL CAPITALIZATION RATE:**  **9.03 %** 
**INDICATED VALUE: $6**  **5,270,377** CONCLUDED VALUE: $65,3 00,000
2019 Tax Year
**INCOME :**  **Office $27.00 PSF**  **@ 529,362 sq. ft. $14,292,774**  **TOTAL: POTENTIAL GROSS INCOME**  **$14,292,774 LESS:**  **Vacancy & Collection Loss @**  **20 % PGI**  **($ 2, 858,555**  **) TOTAL:**  **EFFECTIVE GROSS INCOME**  **$11,434,219**
**STABILIZED EXPENSES :**  **Insurance @ $0.21 x 529,362 sq. ft.**  **$ 111,166 Utilities (net)**  **@ $1.50 x 529,362 sq. ft. $ 794,043**  **Repairs & Maintenance @ $2.25 x 529,362 sq. ft.**  **$1,191,065 Cleaning/Janitorial**  **@ $1.25 x 529,362 sq. ft.**  **$ 661,703 Management/General/Admin.**  **@ 5% of EGI $ 57**  **1 ,7**  **11 Replacement Reserves**  **@ 1% of EGI $ 11**  **4,342 Leasing Commissions**  **@ 5% of EGI $ 57**  **1 ,7**  **11 Tenant Imp. Allowance**  **@ $2.88 x 529,362 sq. ft. $1,524,563**  **TOTAL: STABILIZED EXPE NSES**  **( $ 5,5**  **40 ,**  **304 )** 
**NET OPERATING INCOME $**  **5,893,915 Base Capitalization Rate:**  **6. 57**  **% Plus: Effective Tax Rate:**  **2.533% TOTAL CAPITALIZATION RATE:**  **9.10 %** 
**INDICATED VALUE: $6**  **4,768,297** CONCLUDED VALUE: $64,8 00,000**OTR -MCC, LLC v. Parsippany-Troy Hills Township and** 

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **56 G.**  **Subject property sales In the**  **court’s journey to determine the true or fair**  **market value of real property, the focus of the inquiry is “the price a willing buyer would pay a willing seller.”**  **New Brunswick v. State**  **Div. of Tax Appeals, 39 N.J. at 543. The term market value has been defined as:** 

**the most probable price, as of a sp ecified date, in cash or in terms**  **equivalent to cash, or in other precisely revealed terms, for which the specified property rights should sell after reasonable exposure in**  **a competitive market under all conditions requisite to a fair sale,**  **with the buyer and seller each acting prudently, knowledgeably, and for self**  **-interest, and assuming that neither is under undue duress. [**  **The Appraisal of Real Estate**  **at 58 (14**  **th ed. 2013).]**  **Thus, although the sale of a property reflects**  **an exchange of consideration between parties,**  **it may not be dispositive on the issue of market value. “[T] here may be instances when the sale**  **price may not reflect true market value. In such instances it is for the court to appraise the**  **circumstances surrounding a sale to determine if there were special factors which affected the sale**  **price without affecting the true value.” Glen Wall Assocs. v. Wall Twp.**  **, 99 N.J. 265, 282 (1985). In Parsippany’s expert’s opinion the subject property’s April 2014 sale by OTR** 

**- MCC to** 
**Br ookwood**  **for $82,400,000 was “arm’s length” and credible evidence of the subject property’s**  **true or fair market value. According to Parsippany’s expert, he had**  **discussions with a representative of Brookwood about the marketing and sale of the subject property, confirmi**  **ng that it was arm’s length, however, he could not recall the representative’**  **s name. Conversely, in OTR** 

**- MCC/Brookwood’s expert’s opinion, the April 2014 sale of the**  **subject property by OTR**

**- MCC to Brookwood for $82,400,000 represented a lease**  **d fee value. According to OTR** 

**- MCC/Brookwood’s expert, the subject property was only seventy percent**  **occupied at the time of the sale and the income stream being generated supported the leased fee** **OTR -MCC, LLC v. Parsippany-Troy Hills Township and** 

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **57 purchase price. In OTR** 

**- MCC/Brookwood’s expert’s opinion, Brookwood was a Boston based**  **investor, unfamiliar with the landscape of New Jersey Class A multi**

**- tenanted office buildings.**  **Based on his discussions with Brookwood’s representatives, they believed that a lower sta bilized**  **vacancy could be achieved, thereby increasing the income generated and improving its equity**  **position in the subject property. However, effective cross** 

**- examination of OTR** 

**- MCC/Brookwood’s expert disclosed that**  **Brookwood was not wholly unfamiliar with the New Jersey Class A multi**

**- tenanted offi**  **ce marketplace. Rather, the evidence revealed that Brookwood acquired and sold another Clas**  **s A multi** 

**- tenanted office building in the Morris County, New Jersey marketplace several year**  **s prior to its acquisition of the subject property.**  **46**
**In addition, the testimony of O**  **TR**

**- MCC/Brookwood’s expert**  **further revealed that on or**  **about December 6, 2019, approximately fourteen months after the latest valuation date involved herein, Brookwood entered into a Purchase and Sale Agreement with Monarch Owner**  **, LLC to sell**

**46 Cross** 

**- examination also disclosed that in or about January 2000, OTR**  **-MCC/Brookwood’s expert prepared an appraisal report valuing the subject property on a leased fee bas**  **is. In addition, cross**  **- examination revealed that in or about September 2005, one of OTR**  **-MCC/Brookwood’s expert’s business partners prepared an appraisal report valuing the subject pr**  **operty on a leased fee basis. A leased fee appraisal report**  **values the “ownership interest held by the lessor, which includes the right to the contract rent specified in the lease plus the rever**  **sionary right when the lease expires.” The Appraisal of Real Estate**  **, 72 (14**  **th ed. 2013). T**  **he leased fee approach is influenced by the leasehold interest, including the “remaining term of a lease, the**  **creditworthiness of the tenants, the influence of atypical lease clauses and stipulations, and other**  **factors [that] can affect the value.”**  **Id. at**  **505. Because of these factors, a leased fee appraisal report**  **is of dubious import to this court, which must value the subject property’s fee simple estate.**  **See Marina Dist.**  **Development Co., LLC v. City of Atlantic City ,**  **27 N.J. Tax 469, 488 (Tax 2013), aff’d**  **, 28 N.J. Tax 568 (App. Div. 2015),**  **certif. denied**  **, 223 N.J. 354 (2015); Pine Plaza Associates, L.L.C. v.**  **Ha nover Twp., 16 N.J. Tax 194, 199 (Tax 1996)**  **; Harclay House v. East Orange City**  **, 18 N.J. Tax 564, 569 (Tax 2000);**  **International Flavors & Fragrances, Inc. v. Union Beach Borough, 21 N.J. Tax 403, 423 (Tax 2004). Accordingly, the conclusions of value in the January 2000 and**  **September 2005 appraisal reports were of no consequence to the court and played no role in the court’s determination of the subject property’s true or fair market value herein.** **OTR -MCC, LLC v. Parsippany-Troy Hills Township and** 

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **58 the subject property. That sale was reportedly consummated for $58,500,000, under deed dated**  **March 9, 2020 and recorded**  **on March 12, 2020 in the Morris County Clerk ’s Office**  **in Deed Book 23730, Page 1717.**  **During cross**

**- examination, Parsippany’s counsel vigorously questioned OTR** 

**** **MCC/Brookwood’s expert’s conclusion valuing the subject property for $31,700,000 for the 2019 tax year, despite Brookwood**  **purportedly having entered into a**  **sales agreement on December 6,**  **2019 for $58,500,000. Nonethele**  **ss, OTR** 

**- MCC/Brookwood’s expert steadfastly maintained that**  **he believed his 2019 tax year value conclusion was accurate. In his opinion, Monarch Owner, LLC valued the leased fee interest in the subject property, whereas OTR**  **-MCC/Brookwood’s expert was requi**  **red to value, for Tax Court purposes, the subject property’s fee simple estate. In**
**OTR**

**- MCC/Brookwood’s expert’s opinion, the leased fee interest in a property can be worth**  **substantially more than the fee simple estate, depending on the quality and len gth**  **of the leases being valued.**  **Here, the court concludes**  **that neither**  **the subject property’s April 28, 2014 sale**  **n or the**  **March 9, 2020 sale are**  **dispositive on the issue of the subject property’s true or fair market value.**
**See Glen Wall Assocs. v. Wall**  **Twp. , 99 N.J. 265, 281** 

**- 82 (1985) (concluding that “a bona fide**  **sale of property may be indicative of the true value of the property. Such a sale, however, is not dispositive on the issue of value. We recognize that there may be instances when the s**  **ale pr ice**  **may not reflect true value. In such circumstances it is for the court to appraise th e circumstance**  **surrounding a sale to determine if there were special factors which affected the sal e price without**  **affecting the true value”). The court finds credibl**  **e OTR**

**- MCC/Brookwood’s expert’s testimony**  **that in arriving at the 2014**  **purchase price, Brookwood’s representatives**  **attributed greater weight to the creditworthiness of the subject property’s tenants and the strength of the leases**  **, thereby OTR**  **-MCC, LLC v. Parsippany-Troy Hills Township and**

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **59 valuing the leased** 

**fee interest in the subject property. Moreover,**  **the court finds that the subject property’s March 9, 2020 sale between**  **Brookwood and Monarch Owner, LLC was too remote in time to amount to meaningful evidence of the subject property’s true or market value as of any valuation date involved herein.**  **Accordingly, for the foregoing reasons**  **, t he court gave no consideration to the subject**  **property’s April 28, 2014 sale**  **or March 9, 2020 sale in determining its true or fair market value** 

**.**

**H. Corrected property tax assessment**  **Having reached a conclusion of the subject property’s true or fair market value fo r the** 
**20 09, 2010, 2011, 2012, 2013, 20**  **14, 2015 , 2016, 2017, 2018, and 2019 tax years, the cou**  **rt will endeavor to**  **determine the correct assessments. Under N.J.S.A. 54:51A** 

**- 6(a), commonly referred**  **to as Chapter 123, when the court is satisfied in a non**

**- revaluation year by the evidence presented**  **“that the ratio of the assessed valuation of the subject property to its true value e xceeds the upper**  **limit or falls below the lower limit of the common level range, it shall enter judgment revisin g the**  **taxable value of the property by applying the average ratio to the true value of the property . . . .”** 
**N.J. S.A. 54:51A** 

**- 6(a). This process involves application of the Chapter 123 common level range.**  **N.J.S.A. 54:1-35a(b). When the ratio of assessed value exceeds the upper limit or fall s below the**  **lower limit, the formula for determining the revised taxable value of property, under N.J.S.A**

**. 54:51A-6(a), is as follows:** 

**True market value x**  **Average ratio =**  **Revised taxable value For the 2009 tax year, the ratio of total assessed value, $57,660,700, to true market value,**  **$69,400,000 , yields a ratio of 0.8**  **308 %, which falls within the upper limit (87.76%) and lower**  **limit (64.86%) of Parsippany’s 2009 tax year**  **Chapter 123 common level range. Consequently, no reduction in the subject property’s 2009**  **local property tax assessment is warranted**

**. OTR**  **-MCC, LLC v. Parsippany-Troy Hills Township and**

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **60 For the 20**  **10 tax ye**  **ar, the ratio of total assessed value, $57,660,700, to true market value, $68,800,000**  **, yields a ratio of 0.8 381**  **%, which falls within the upper limit (8 8.77**  **%) and lower limit (6**  **5.61 %) of Parsippany’s 20**  **10 tax year Chapter 123 common level range. Consequently, no**  **reduction in the subject property’s 2010 local property tax assessment is warranted** 

**. For the 20**  **11 tax year, the ratio of total assessed value, $57,660,700, to true market value,**  **$60,800,000 , yields a ratio of 0.**  **9484 %, which**  **exceeds the upper limit (**  **91.25 %) of Parsippany’s** 
**2011 tax year Chapter 123 common level range. Consequently, the subject property’s revised**  **2011 tax year assessment calculation is**  **as follows: $60,800,000 x .7934**  **(Average Ratio) = $48,240,000**  **[ROUNDED] Accordingly,**  **a judgment establishing the subject property’s local property tax assessment**  **for the 2011 tax year will be entered as follows:** 

**Land $18,496,200**  **Improvement $29,743,800**

**Total $48,240,000** 
**For the 20 12**  **tax year, the ratio of total assessed value, $57,660,700, to true market value, $60,200,000**  **, yields a ratio of 0. 9578**  **%, which exceeds**  **the upper limit ( 92.85**  **%) of Parsippany’s**
**2012 tax year Chapter 123 common level range.**  **Consequently, the subject propert**  **y’s revised 2012 tax year**  **assessment calculation is as follows:**  **$60,200,000 x .8074 (Average Ratio) = $48,605 ,000 [ROUNDED]**  **Accordingly, a**  **judgment establishing the subject property’s local property tax assessment for the 2012**  **tax year will be entered as follows:**

**Land $18,496,200**  **Improvement $30,108,800**

**Total $48,605,000** **OTR -MCC, LLC v. Parsippany-Troy Hills Township and** 

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **61 For the 20**  **13 tax year, the ratio of total assessed value, $57,660,700, to true market value,**  **$62,500,000 , yields a ratio of 0.**  **9226 %, which falls within the upper limit (**  **98.45 %) and lower**  **limit ( 72.77**  **%) of Parsippany’s 20 13**  **tax year Chapter 123 common level range. Consequently, no reduction in the subject property’s 2013**  **local property tax assessment is warranted**

**. For the 2014 tax year, the ratio of total assessed value, $57,660,700, to true market value,**  **$66,300,000 , yields a ratio of 0.8**  **697 %, which falls within the upper limit (**  **97.68 %) and lower**  **limit ( 72.20**  **%) of Parsippany’s 20 14**  **tax year Chapter 123 common level range. Consequently, no reduction in the subject property’s 2014**  **local property tax assessment is warranted**

**. For the 20**  **15 tax year, the ratio of total asse**  **ssed value, $57,660,700, to true market value, $67,200,000**  **, yields a ratio of 0.8 580**  **%, which falls within the upper limit ( 97.07**  **%) and lower limit (**  **71.74 %) of Parsippany’s 20**  **15 tax year Chapter 123 common level range. Consequently, no**  **reduction in the subject property’s 2015 local property tax assessment is warranted** 

**. For the 201**  **6 tax year, the ratio of total assessed value, $**  **57,660,700 , to true market value,**  **$66,800,000 , yield**  **s a ratio of 0.8632**  **%, which falls within**  **the upper limit (97.06%)**  **and lower limit (71.74%) of the Chapter 123 common level range. Consequently, no reduction in**  **the subject**  **property’s 2016 local property tax assessment is warran ted.**  **For the 201 7**  **tax year, the ratio of total assessed value, $ 57,660,700**  **, to true market value, $65,800,000**  **, yields a ratio of 0.8763**  **%, which**  **falls within the upper limit (95.62%)**  **and lower limit**  **(70.68 %)**  **of Parsippany’s 20 17**  **tax year Chapter the Chapter 123 common level range.**
**Co nsequently, no reduction in the subject property’s 201**  **7 local property tax assessment is**  **warranted. For the 201**  **8 tax year, the ratio of total assessed value, $**  **57,660,700 , to true market value,**  **$65,300,000 , yields a ratio of**  **0.8830 %,**  **which falls within the**  **upper limit ( 96.30**  **%) and lower** **OTR -MCC, LLC v. Parsippany-Troy Hills Township and** 

**Brookwood MC INV. I & II % CBRE v. Parsippany-Troy Hills Township Page**  **62 limit**  **(71.18 %)**  **of Parsippany’s 20 18**  **tax year Chapter the Chapter 123 common level range. Consequently, no reduction in the subject property’s 201**  **8 local property tax assessment is**  **warranted. For the 201**  **9 tax year, the ratio of total assessed value, $**  **57,660,700 , to true market value,**  **$64,800 ,000, yields a ratio of**  **0.8898%, which falls within the upper limit (**  **95.91%) and lower**  **limit (70.89%)**  **of Parsippany’s 20 19**  **tax year Chapter the Chapter 123 common level range. Consequently, no reduction in the subject property’s 201**  **9 local property tax a**  **ssessment is warranted.** 
III. Conclusion **Accordingly, for the above stated reasons, contemporaneously herewith the court**  **will enter judgments**  **affirm ing**  **the subject property’s 2009, 2010, 2013, 2014, 2015, 2016**  **, 2017, 2018, and**
**2019 local property tax**  **assessment s.**  **In addition, contemporaneously**  **here with the court will enter**  **judgments reducing the subject property’s 2011 and 2012 local property tax assessments. Very truly yours,** 
**Hon. Joshua D. Novin, J.T.C.**