Tax Court: 3 University Plaza SPE, LLC/3 Univ. Plza SPE % Normandy RE P v. Hackensack City; Docket Nos. 005002-2014, 001670-2015, 003553-2016, 001163-2017, 003768-2018, and 012891-2019, opinion by Novin, J.T.C., decided February 24, 2022. For plaintiff – Michael J. Caccavelli and Grace Chun (Pearlman & Miranda, LLC, attorneys); for defendant – Kenneth A. Porro (Chasan Lamparello Mallon & Cappuzzo, P.C., attorneys).
The court found that no globally accepted practice has been adopted for the handling of tenant improvement allowances and leasing commission expenses under reconstructed operating statements. For local property tax valuation purposes, the decision to include or exclude tenant improvement allowances and leasing commissions, as stabilized operating expenses, is a function of context, the market, and the intended use of the appraisal report. The characterization of tenant improvement allowances and leasing commissions must be based on the appraiser’s examination of a property’s historical operations, and evaluation and analysis of market conditions. When tenant improvement allowances and leasing commission expenses are necessary to achieve economic or market rent, stabilize occupancy, and maintain a property’s value, they may be treated as operating expenses and deducted from effective gross income in calculating net operating income. However, an appraiser may reject certain expenses, including tenant improvement allowances and leasing commissions, when they are erratic, uncharacteristic, and not typical in the market or industry. Here, the court concluded that plaintiff’s expert’s approach, deducting tenant improvement allowances and leasing commissions as "above-the-line" stabilized operating expenses, was reasonable and supported by the trial record. The court further concluded that the Band of Investment technique provided the most accurate and reliable method of deriving a capitalization rate because it is not polluted or impacted by questions of how potential survey recipients perceived hypothetical transactional questions or how a market perceives an annually reoccurring operating expense. Finally, in reducing the property’s 2014 and 2015 tax assessments, the court found that the subject property’s 2019 sale was not credible evidence of true or fair market value. The court scheduled the 2016, 2017, 2018, and 2019 tax year matters for further proceedings.