CRABTREE, J.T.C.
This is a local property tax case wherein plaintiff seeks direct review pursuant to N.J.S.A. 54:3-21 of the 1984 assessment on its property located at 1143-1157 Kennedy Boulevard, Bayonne, New Jersey (Block 46-53, Lots A, B C). That assessment was: Land $835,000 Improvements 215,000 _______ Total $1,050,000 At issue are the true value of the subject property and whether plaintiff is entitled to relief from assessment discrimination pursuant to N.J.S.A. 54:51A-6, commonly referred to as chapter 123.
The subject of the controversy is a three-story brick 216-unit garden apartment complex situated on 6.41 acres of land, generally well-maintained and with convenient access to public transportation and to major highways leading to nearby large metropolitan communities. The amenities include open parking on the premises, substantial landscaping and laundry facilities on a concession basis. There are no garages.
The building was constructed about 35 years prior to the assessing date and consists of brick veneer over exterior masonry walls, interior wood-frame construction, asphalt shingle roofs, aluminum gutters and leaders, steel fire escapes, steel double-hung sash with aluminum screens only and wood entrances. Heat and hot water are supplied by dual-fired hot water boilers and separate gas-fired hot water heaters.
The owner provides heat and hot water and a stove and refrigerator in each apartment. Gas and electricity service in the apartments are paid by the tenants.
At all times pertinent hereto, a rent-control ordinance was in effect in the defendant municipality. Under that ordinance the landlord, upon application to the rent-control board, was permitted an annual rent increase for each apartment in an amount equal to the lesser of 5.5% or the change in the consumer price index (CPI) from the inception of the lease to a date 60 days prior to its termination or expiration. The ordinance also provided for hardship and capital improvement increases.
All leases in the subject property were for one year or less.
Both experts relied solely on the economic approach to value. Their respective true value estimates and the manner in which the estimates were developed are shown in the following tabular form: Plaintiff Defendant Economic rent $790,639 $815,670 Vacancy collection loss (23,719) (3%) (16,313) (2%) Adjusted rental income 766,920 ___ Laundry commissions 4,860 ___ Miscellaneous income 1,000 ___ Effective gross income 772,780 799,357 Expenses: Insurance 14,780 7,000 Plaintiff Defendant Electric gas (incl. fuel) 182,285 170,000 Water sewer 16,112 16,200 Wages payroll taxes 72,017 71,300 Maintenance repairs 80,000 40,000 Painting 17,870 11,000 Reserves for replacements 10,260 5,200 Management 38,350 40,000 Professional fees misc. 5,000 ___ Supplies ___ 5,000 Landscaping ground maintenance ___ 15,000 ______ ______ Total expenses $436,674 $380,700 ======== ======== Effective net income 336,106 418,657 Capitalization rate 17.26% 15.5% True value (rounded) $1,950,000 $2,700,000 The most critical difference between the experts lies in their estimate of economic rent. Both experts annualized the October 1, 1983 rent rolls. Plaintiff's expert posited that annualization as his tax year gross rental income, while defendant's expert grossed up the annualization by 2 1/2% to reflect what he believed to be the reasonable expectation of the putative purchaser of the rent level prevailing in the tax year by virtue of the minimum rent increases allowable under the rent-control ordinance.
I find the economic rent to be $810,000 (exclusive of laundry and miscellaneous income), the level posited by defendant's expert. The latter's adjustment reflects the inevitable increases allowable under the defendant's rent-control ordinance. The expert's reliance upon CPI changes is documented by the actual changes as reported in The Appraiser magazine for the years 1981 to 1983. While those changes all exceeded 2.5%, the expert's choice of that figure reflects the fact that leases are renewed at various times throughout the year.
Post-assessing date events may be probative of true value where they are reasonably foreseeable on the assessing date. Fort Lee v. Invesco Holding Corp. 3 N.J. Tax 332 (Tax Ct. 1981), aff'd 6 N.J. Tax 255 (App.Div. 1983), certif. den. 94 N.J. 606, 468 A.2d 238 (1983); Inwood at Great Notch v. Little Falls Tp., 6 N.J. Tax 316 (Tax Ct. 1984). The purchaser is primarily concerned with the anticipated return on his investment; and his expectation of future benefits is most certainly not confined to the rents currently charged. Parsippany Hills Assoc. v. Parsippany-Troy Hills Tp., 1 N.J. Tax 120 (Tax Ct. 1980); Berenson v. East Orange, 6 N.J. Tax 12 (Tax Ct. 1983), aff'd o.b. per curiam 6 N.J. Tax 493 (App.Div. 1984).
The remaining differences involve the proper vacancy allowance, some of the expenses and the appropriate capitalization rate.
The 3% vacancy allowance posited by plaintiff's expert is based upon his own experience as manager of the subject property and his knowledge of the actual vacancies and losses occurring therein over several years. Defendant's expert posited his 2% vacancy allowance on the recent history of occupancies within defendant taxing district. Plaintiff's expert's conclusion is predicated on specific data respecting the subject property and is thus more persuasive. I find the appropriate vacancy and collection loss allowance to be 3%.
The expenses posited by plaintiff's expert are all founded on hard data and upon his extensive experience as manager not only of the subject property but of many other large apartment complexes. His explanation of the upward adjustment made for insurance expense was eminently sound and the other expenses which he used were either the actual expenses of the property or were applications of expense levels prevailing in other apartment complexes similar in size and age to the subject. His prolix documentation of expense ranges reflected in a survey of 159,929 apartments contained in 1,036 buildings built in the 1960s amply supported his expense projections.
The probative utility of an expert's opinion depends upon the facts and reasoning presented in support of it. Dworman v. Tinton Falls, 1 N.J. Tax 445 (Tax Ct. 1980), aff'd o.b. per curiam 3 N.J. Tax 1 , 434 A.2d 1134 (App.Div. 1981).
Accordingly, I find the expenses to be $439,124, the amount posited by plaintiff's expert except for the 5% management fee, which was increased from $38,350 to $40,800 to reflect the economic gross income as herein found.
This leads us to the final point of controversy, namely, the capitalization rate. Both experts employed the band of investment, mortgage-equity approach. They agreed on an equity return of 10% and upon 25 years as the length of the amortization schedule of the first mortgage. They disagreed on the positions and on the mortgage rate. Plaintiff's expert posited a 75% mortgage at 13.5%, while defendant's expert posited a 70% mortgage at 12%, which he ignored and chose an overall rate of 15.5%.
Plaintiff's expert concluded that mortgage lenders charge more for loans to rent-controlled apartments than they charge for loans to apartments not subject to rent control. In support of this conclusion he proffered 22 apartment loan transactions in both rent-controlled and non-rent-controlled municipalities. The mortgage interest rates on 1982 and 1983 apartment loans in non-rent-controlled communities ranged from 12.5% to 13%. Mortgage loans to apartments in rent-controlled communities, however, ranged from 12.5% to 14.25% in 1982 and 1983.
The expert's conclusion thus rests on hard data and I find that 13.5% is a realistic mortgage rate reflective of the lender's risk in a rent-controlled community.
By the same token, the loan value must also reflect the lender's risk; and a 70% position is more consistent with that risk estimate than the 75% position proferred by plaintiff's expert. Moreover, the voluminous statistical data from the American Council of Life Insurance assembled in the expert's report supports a 70% loan position. Of the 34 apartment loans made by 20 life insurance companies in the fourth quarter of 1982 in six geographic regions of the United States, the highest loan value was 69.1%. No data was offered with respect to 1983; and the court can draw no inference that the loan value in that year exceeded 70%, irrespective of whether the apartments were located in rent-controlled or non-rent controlled communities.
I therefore conclude that the appropriate capitalization rate is 17.06%, calculated pursuant to the band of investment, mortgage-equity method, as follows: 70% mortgage @ 13.5%, 25 years, constant 13.99% 9.79% 30% equity @ 10% 3.00 Effective tax rate (9.453 X .452) 4.27 ____ 17.06% In view of the foregoing I find the true value of the subject property on October 1, 1983 to be $2,065,860, calculated under the income method as follows: Economic rent $810,000 Less 3% vacancy loss allowance (24,300) ________ Adjusted rental income $785,700 Plus laundry commissions and miscellaneous income 5,860 _______ Effective gross income 791,560 Less expenses: Insurance $ 14,780 Elec. gas (incl. fuel) 182,285 Water sewer 16,112 Wages payroll taxes 72,017 Less expenses: Maintenance repairs $ 80,000 Printing 17,870 Reserves for replacements 10,260 Management 40,800 Professional fees misc. 5,000 $439,124 _______ ________ Effective net income $352,436 Capitalized at 17.06% True value $2,065,860 (rounded) Pursuant to chapter 123, the Director, Division of Taxation, determined the average ratio for defendant taxing district to be 45.20% for the tax year 1984. The upper limit of the common level range is 51.98%, while the lower limit is 38.42%. The 1984 assessment on the subject property is 50.83% of the property's true value as hereinabove found. As the ratio of the assessment to true value is below the upper limit of the common level range, plaintiff is not entitled to discrimination relief.
Judgment will be entered affirming the assessment.