Rite Aid Goes the Wrong Way In Tax Appeal
In a recent opinion the New Jersey Tax Court affirmed the assessment on a Rite Aid pharmacy for tax years 2009 and 2010 after rejecting every aspect of the testimony offered by its appraiser. The Court found that the appraiser for the Borough of Roselle offered a more credible opinion of value.
Rite Aid’s appraiser considered the cost approach, the income capitalization approach, and the comparable sales approach. The Borough’s appraiser relied only upon the income capitalization approach. The Court rejected the opinions of value offered by Rite Aid’s appraiser under the cost approach and sale comparison approach. In doing so, the Court reiterated its longstanding preference for the income capitalization approach in valuing an income producing property such as the subject property.
Under the income approach, the appraisers differed greatly in the type of leases they relied upon. Rite Aid’s appraiser testified that leases executed in connection with the construction of free-standing pharmacies similar to the subject are not credible evidence of market rent. Instead, Rite Aid’s appraiser relied on leases for generic retail space. The Borough’s appraiser relied on the subject lease, discussed below, as well as four other free-standing buildings with national retail pharmacies as tenants, similar to the subject property.
The Court noted that Rite Aid’s appraiser did not consider the subject lease which had been entered only three years before the first valuation date. The Court stated that a subject transaction “near in time to the valuation date is excellent evidence of market value.”
Plaintiff’s expert claimed the subject lease was not a reliable indicator of market rents. His stated reasons for not using the subject lease included: (1) it is a long-term lease with a national tenant; (2) it resulted from a business decision of a prior tenant to locate a pharmacy on the subject property and arranged for a built-to-suit structure to be constructed by the property owner; (3) the rent may have resulted from a desire to enter the local retail pharmacy market; and (4) the rent might include a return on the cost of construction of the building. The Court was unconvinced. While the Court acknowledged that the subject lease might not reflect market rent, Rite Aid’s appraiser did not provide any evidence to support his conclusions.
Also problematic for Rite Aid was that its appraiser relied on only two pharmacy leases, both of which were in structures that were not built to suit for the pharmacy tenants. The first lease was a retail unit in a strip mall. However, the appraiser reported only the initial rent in 2006 and while aware that the lease provided for rent increases, the appraiser was unaware of the amount of such increases or when they took effect because he reviewed only a lease summary and not the lease itself. As for the second pharmacy lease, the Court concluded that the appraiser had not verified the lease and was unfamiliar with its terms as he did not know if the lease was a renewal and could not identify the tenant with certainty.
The Court concluded that the Borough’s appraiser offered a more credible opinion of market rent, as well as his determination of a vacancy/collection loss, factor, expenses and capitalization rate.
Rite Aid’s appraiser went in the wrong way in his approach to this assignment. The proliferation of free-standing pharmacies such as Rite Aid, CVS and Walgreens prominently located throughout the state is evidence of this discrete and robust market, which had to be taken into account in valuing the subject property.
A copy of the Court’s opinion in Rite Aid Corp. v. Borough of Roselle may be found here.