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Winning Tax Appeals in a Down Market

"Proving market value in a declining market can be difficult, especially when that market is beset by contraction of the economy..."

By John E. Garippa , Esq. as published by Real Estate New Jersey, September 2008

Property owners in New Jersey face a very challenging year in 2008. Rental rates have eroded across all classes of property, and vacancy rates continue to rise. Having anticipated these erosions in value, many prudent property owners have filed tax appeals on their properties to reduce taxes. However, proving market value in a declining market can be a most difficult task, especially when that market is beset by an overall contraction of the economy, as well as a significant malaise in the capital markets.

By law, all property in New Jersey must be valued by taxing jurisdictions as of October 1 of the prior tax year. This means that for assessments established in 2008, the appropriate valuation date is October 1, 2007. The problem facing taxpayers this year is how to prove market value when that value has been eroding every quarter since last year.

The following examples illustrate the issues. Assume a 10 year old class A office building that as of 1/1/2006 enjoys tenancies averaging $30 per square foot and a vacancy rate of 5%. For the next 18 months, these lease rates begin to diminish. During 2007, the average rental in the first quarter falls to $28 per square foot, and in each succeeding quarter continues to decline by a dollar a square foot until the fourth quarter ending December 31, 2007, when it reaches $25 per square foot.

Under this scenario, a taxpayer should contend that the proper valuation of this property can be no more than $26 per square foot, which is reflected as of the October 1, 2007 quarterly analysis. Moreover, even though the $25 per square foot rentals for the 4th quarter of 2007 come later than the October 1, 2007 valuation date, this data corroborates the fact that shrinking rentals are affecting the property. Thus, the value of the tenancies should be no greater than the $26 per square foot valuation for the 3rd quarter. Averaging the rentals for the entire year does not properly value the property as of the valuation date.

A similar fact pattern can be outlined with vacancy rates. Assume the property begins to demonstrate a weakening demand, suggesting that the vacancy rate of 5%, which was appropriate for 2006, erodes each quarter and continues to do so throughout 2007. Toward the latter part of 2007, the vacancy rate at the property reaches 10%. In this case, a taxpayer should contend that the proper vacancy at the property, based on current market evidence, is approaching 10%. Although the average vacancy for the 2007 tax year might be only 7%, the continual increase in the vacancy rate throughout the entire year provides substantiating evidence of higher vacancies. This scenario clearly points to a reduced market value.

A second problem: While the evidence discussed above demonstrates that the property suffers from reduced demand, under New Jersey law, the taxpayer must show that this deterioration exists in other similar property. Thus, the taxpayer must produce data supporting the fact that all office property in the competitive area has endured reduced demand for rentals and increased vacancies.

This opens an opportunity for a carefully crafted forensic appraisal, one that effectively portrays the story behind declining value and demand. A competent appraiser should review all of the market data that documents an overall reduced demand for similar property. Also, there should be an exhaustive review of vacancy factors proving that the reduced demand at the taxpayer's property is not due to mismanagement, but rather to reduced demand in the market area.

A comprehensive review of economic data becomes singularly important to demonstrate that the entire area surrounding the taxpayer's property is experiencing a slow down in demand. Some of the factors to include in this review are: unemployment statistics, bankruptcy filings, business closings, population growth/decline, housing data, availability of office space as well as the general population trends in the state. All of these statistics form the basis for explaining reduced demand and increased vacancy.

As taxing jurisdictions face the growing reality of reduced resources due to the slowing economy, obtaining tax reductions will become even more difficult for taxpayers. In order for owners to prevail in a tax appeal, a compelling story must be developed concerning the taxpayer's property and market in which that property competes. Critical to this story is solid evidence that the market has sustained declines, continues to decline, and the property is part and parcel of that same competitive market.

GarippaJohn E. Garippa is senior partner of the law firm of Garippa, Lotz & Giannuario with offices in Montclair and Philadelphia. Mr. Garippa is also the president of the American Property Tax Counsel, the national affiliation of property tax attorneys, and can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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