Tax courts don't always recognize market value in setting property tax assessments.
Most real estate is taxed ad valorem, or according to the value. The theory is that each person is taxed on the value of the real property they own.
The New Jersey Constitution (Article VIII, Section 1, paragraph 1) stipulates that property is to be assessed for taxation by general laws and uniform rules, and that all non-agricultural real property must be assessed according to the same value standard.
Our statutes define the standard of value as the true property value. We call this market value, or the most probable price a property will bring in a competitive and open market under conditions requisite to a fair sale. That assumes the buyer and seller are each acting prudently and knowledgeably, and that the price is unaffected by undue stimulus.
In 2005, the state Tax Court, in a General Motors case, openly admitted it was making a determination that the highest and best use of the property was as an auto assembly facility. By this determination, the court set public policy indicating that this highest and best use fairly and equitably distributed the property tax burden.
In this case the court felt it was necessary to conclude the highest and best use of the property at issue was an auto assembly plant because to do otherwise may allow features of the property to go untaxed and therefore lower the value of the plant. The court also stated that this determination was consistent with and effectuates the public policy of fairly and equitably distributing the property tax burden. All of this was concluded while the market data suggested a different result, given that no auto manufacturing facility had ever before been sold to another automobile manufacturer. Further, by law, the tax court's role is to determine value, not to redistribute the tax burden.
The history of the Tax Court has, in practice if not in theory, interpreted the constitution and statutes of real property taxation to find value in a uniform and stabilized manner. In other words, although the market may vary over a period of years under review, the court would attempt to stabilize the effect of the differences when rendering opinions.
The Tax Court would also set precedent by using methods of valuation not normally used in the marketplace because it deemed the data before it at trial to be lacking. It has, for example, applied a cost approach to determine value when a buyer would purchase a property based on an income approach. This is common in court decisions, but often runs afoul of true market motivations and distorts the conclusion of value. The more the courts reach these types of decisions, the further away they move from concluding market value.
The court's attempt to carry these principles forward has appeared in various ways over the years. As early as 1996, in a case involving a super-regional mall with anchors not separately assessed, the Tax Court deemed the income approach inappropriate to value the stores and instead valued the stores on a cost approach. Today, the legacy of that decision requires plaintiffs to present a cost approach, which is not evidence of market value. This may well distort a property's valuation.
Issues such as capitalization rates are also problematic for certain assets in Tax Courts findings. Over the years, court precedent has set rates that often do not reflect the market. This is especially evident today when valuing regional malls classified as B or C grade. The market capitalization rates are well over those the courts have historically found. Although transactions verify this market data as accurate, the courts fail to recognize it, making it difficult for plaintiffs to prevail with values based on actual, transactional data.
In January 2018, after a number of decisions that rejected plaintiffs' approach, our Tax Court appears to have taken some pause. It recognized that by rejecting proofs from the market and data forwarded by taxpayers, it was ultimately failing to conclude to warranted assessment adjustments.
"there has been some criticism of late, that the Tax Court perhaps has raised the bar for meeting the standard of proof too high in property tax appeals, given arguendo, what could be viewed as a growing trend seen in a number of recent decisions, where the court rejected expert opinions and declined to come to value. While such a suggestion may give the Tax Court pause for self-examination and reflection, it must not serve to invite expert appraisers to abrogate their responsibility of providing the court with 'an explanation of the methodology and assumptions used…'"
The quote seems to recognize that the proof bar was getting so high that a plaintiff could never prove its case. A more realistic view of the proofs provided by a taxpayer comes with it the recognition that market data and actions from market participants are the touchstones of value that should establish our assessments.