Sales Approach Rejected in Valuing Rental Property
In reviewing a recent decision by the Honorable Patrick DeAlmeida, the Presiding Judge of the New Jersey Tax Court, the first thing that jumps out is the large reductions — approximate $1.84 million in reduced assessments for each of the years under appeal. The appeal involved a free-standing Barnes & Noble store in Evesham Township brought by the retailer, a tenant responsible for paying the property taxes.
But perhaps a more significant issue was also addressed in this tax appeal matter – whether a comparable sales approach to value is a proper method of valuation in a court proceeding concerning an income producing property. The appraisers for both the taxpayer and the Township relied primarily on the income approach to value the property. The court affirmed the income approach as the preferred method in estimating the value of income producing property. Both appraisers also employed the comparable sales approach to corroborate their valuations under the income approach. However, the court struck the testimony of the Township’s appraiser regarding his opinion of value using the sales approach. This opinion relied on comparable sales of buildings subject to existing leases. The Township’s appraiser did not analyze the leases or the impact of those leases on the sales price. As a result, the court concluded this opinion of value under the sales approach, which sales may have been probative of the “leased fee” value but not the unencumbered fee simple value, as unreliable.
The decision underscores the long recognized principle that there is no single determinative approach to valuing property. Each property possesses unique characteristics. An appraiser must employ a valuation method to take into account all of the facts and circumstances that bear upon value. While by no means perfect, the income approach provides the best means of valuing income producing property.
A copy of the unreported decision in Barnes & Noble #2664 v. Township of Evesham, may be found here.