N.J. TAX COURT

Regent Care Center Inc. v. Hackensack

TAXATION

New Jersey Law Journal

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Regent Care Center Inc. v. Hackensack, Nos. 004748-2007, 004605-2008, 004972-2009, 006814-2010; Tax Court; opinion by Andresini, J.T.C.; decided and approved for publication January 28, 2013. DDS No. 35-5-8884 [22 pp.]

Regent Care Center Inc., the owner of a nursing home built in 1988 in Hackensack, challenges the assessments on the property for tax years 2007, 2008, 2009 and 2010.

The parties came to a number of stipulations at trial, which the court accepted, leaving as issues only the amounts properly attributable to entrepreneurial profit and depreciation. The depreciation issue includes disputes over the appropriate values attributable to physical depreciation, functional obsolescence and economic obsolescence.

Held: Plaintiff's expert's opinion as to entrepreneurial profit is accepted, concluding that it reasonably reflects the time, effort and incidental expenses of the owner-occupier in the development of the nursing home. It also accepts his calculation regarding physical depreciation given its continuous use and applies a $900,000 deduction for functional obsolescence. However, it finds that the property does not suffer from economic obsolenscence.

The court begins its analysis by restating the well-established principle that original assessments and judgments of county boards of taxation are entitled to a presumption of validity. However, it finds that, if taken as true, plaintiff's expert's opinion and the facts on which he relied create a debatable question regarding the correctness of the assessments sufficient to allow the court to make an independent determination of the value of plaintiff's property.

It then considers entrepreneurial profit, which reflects the difference between a property's total cost and its value after completion. It is included in determining market value when the developer or owner-operator makes improvements to property with the anticipation of realizing a profit on its resale. The status of the builder (as developer or owner-operator) is not dispositive of whether to include entrepreneurial profit within market value. It is justified, even for an owner-occupied and owner-constructed building, because the principle of uniformity requires such property to be treated in the same manner as investment or speculation property.

After stating that 5 percent to 10 percent represented the typical addition for entrepreneurial profit, plaintiff's expert added 5 percent, arguing that because the subject was built for the needs of a specialized owner-occupier, a low value was appropriate. Defendant's expert added 10 percent. The court concludes that 5 percent is appropriate and reasonable, to reflect the time, effort and incidental expenses of the owner-occupier in the development of the nursing home.

As to depreciation, plaintiff's expert determined total depreciation to be 50 percent, broken down as 30 percent physical depreciation, 5 percent functional obsolescence and 15 percent economic obsolescence. Defendant's expert calculated 8 percent total depreciation. The court accepts 30 percent for physical depreciation, includes $900,000 for functional obsolescence, and excludes economic obsolescence.

It says plaintiff's expert used the economic age-life method, which estimates total depreciation by calculating the ratio of the effective age of the property to its economic life expectancy and applying this ratio to the property's total cost. Using a Marshall and Swift life expectancy guideline table specifically for nursing homes and a physical inspection of the property, he calculated a 15-year effective age and a 50-year useful life. Relying on a Marshall and Swift life expectancy guideline table for national commercial properties, defendant's expert used a 10-year effective age and a 45-year useful life. He did not use the economic age-life method.

The court says that defendant's expert's explanation of how he arrived at his figures was comparatively lacking. Although he explained that he put information into a computer model, he did not elaborate on what factors the computer model took into account. Without more support regarding the actual data inputs or the weight given to the particular drivers for that computer model, it is difficult to conclude that a 10-year effective age is appropriate or reasonable. Since no major renovations have taken place in the subject since its construction in 1988, and since the facility is in constant use, a 15-year effective age adequately reflects the toll being taken from actual usage.

The court also finds that the economic age-life method combined with the Marshall and Swift table specifically designed for nursing homes is a more reliable method than the table for national commercial properties relied on by defendant's expert because a typical commercial property is not in continuous use. The court accepts plaintiff's expert's opinion on depreciation as a more accurate reflection of the subject's condition and with it, his depreciation calculation under the economic age-life method. Therefore, the court accepts a 30 percent deduction for physical depreciation.

The court then considers function obsolescence, which is caused by a flaw in the structure, materials or design of the improvement when compared with the highest and best use and most cost-effective functional design requirements at the time of the appraisal. Plaintiff's expert attributed 5 percent functional obsolescence to the property, listing physical deficiencies, such as a lack of direct oxygen pumping into rooms and that the emergency generator did not connect to all outlets in patient rooms, as well as restrictions posed by governmental regulations, like Medicare or Medicaid. Defendant's expert attributed 0 percent.

Concluding that the items at issue are curable, the court accepts testimony that the cost to cure is $900,000 and applies a deduction for functional obsolescence in that amount using the replacement cost method.

Plaintiff's expert attributed 15 percent economic obsolescence to the property based primarily on the decrease in occupancy rates and revenues of the facility and reductions in government reimbursements; defendant's expert attributed 0 percent. Finding that plaintiff's expert provided no economic data or empirical evidence relating to the lack of government reimbursements or increase of beds in other facilities, the court gives no weight to his opinion regarding economic obsolescence. Rather, it agrees with defendant's expert that the property does not suffer from economic obsolescence.

The court then determines the market value of the property for the years at issue and the chapter 123 ratios, and reduces the challenged assessments.

For plaintiff — Amber N. Heinze (The Irwin Law Firm). For defendant — Donald J. Lenner.

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