SAIBER SCHLESINGER SATZ & GOLDSTEIN REAL ESTATE UPDATE

A publication of Saiber Satz & Goldstein, LLC

This is the first issue of the Saiber Satz & Goldstein Real Estate Update J, a quarterly publication of the real estate and environmental department of Saiber Satz & Goldstein, LLC. The purpose of the newsletter is to highlight important legal developments and issues affecting the New Jersey real estate community. This issue looks at two areas: (1) the real estate tax appeal process; and (2) a recent appellate case affecting commercial landlords. We hope you find the information helpful.

Real Estate Tax Appeals: The Time to Act is Now!

BY NINO COVIELLO

Real estate taxes are the most significant operating expense affecting property owners in New Jersey. In this competitive market, it is important to minimize expenses. The good news is that property taxes in New Jersey are controllable with a regular program of assessment review and tax appeals. Even property owners that have tenants paying real estate taxes under a net lease should be concerned about real estate taxes. Why? Because property owners can obtain higher rents if the taxes paid by the tenant to the local taxing authority are reduced.

As property owners are no doubt aware, property taxes in New Jersey are among the highest in the nation. Accordingly, since property owners have no control over the annual tax rate for their property, the only chance to reduce property taxes is by filing a tax appeal by April1, 2002.

In order for an assessment to be deemed excessive or discriminatory, a taxpayer must prove that an assessment does not fairly represent one of two standards:

1. All assessments must represent 100% of true market value as of the previous October 1st, in a year following a revaluation or reassessment. The October 1st pre-tax date is called the annual "assessment date." All evidence submitted in a tax appeal should precede the assessment date, especially real property sales used as compatibles.

2. In a non-revaluation or non-reassessment year, the assessment must exceed the lower level range determined for a particular municipality. To understand the common level range, consideration must be given to what happens following a revaluation.

Once a revaluation is completed, factors such as inflation, appreciation, and depreciation cause property values to increase or decrease at different intervals. Since an assessor does not adjust an assessment of property on an annual basis, a deviation from 100% of true market value will generally occur. The New Jersey State Division of Taxation, with the assistance of the local assessor, annually conducts a fiscal year sale survey, investigating property transfers that occur in a municipality. This sales data is compared individually to corresponding assessments to determine an average level of assessment in a municipality. An average Aratio@ is developed to represent the assessment level in every community. In any year, except the year in which revaluation or reassessment is implemented, the common level of assessment is the average ratio of the district in which your property is situated, and is used by the County Board of Taxation to determine the fairness of an assessment. In a revaluation or reassessment year, the common level is 100% and is used by the County Board of Taxation to determine the fairness of an assessment.

To determine if an assessment is accurate or fair, the true market value of property must be compared to the assessment. If the ratio of the assessment to true value exceeds the average ratio by 15%, then the assessment is automatically reduced to the common level. However, if the assessment falls within the common level range, plus or minus 15% of the average ratio, no adjustment will be made. It is important to note, however, that if the assessed to true value ratio falls below the common level range, the County Tax Board may increase the assessment to the common level. Hence, it is imperative for the property owner to avoid this pitfall.

An example of how to determine if an assessment is reasonable follows:

Average ratio = 85%
Common level range = 72.25% to 97.75% (plus or minus 15%)
True value = $1,000,000
Assessment = $900,000
Ratio = 90%
($900,000/$1,000,000)

The results of this example indicate that the assessment is reasonable, since it falls within the common level range.

If property is significantly over assessed, and substantial tax savings may be secured, the tax year 2002 may present an opportunity to obtain a significant reduction in real estate taxes. Please bear in mind, the tax appeal filing deadline is Monday, April 2, 2002. Mark your calendars.

Mr. Coviello serves as the head of the tax department of SSS&G. In that capacity, he has successfully represented property owners in both residential and commercial property tax appeals. He may be reached at nac@saiber.com.

Code violations issued by a municipality can cost a landlord much more than just the cost of remedying them: so says the New Jersey Appellate Division in its recent unpublished opinion in Sharut Furniture v. Vornado Realty Trust. In Sharut Furniture, the court held that where the tenant=s leased premises (i.e., furniture showroom) incorporated the use of the basement into its operations, lease provisions imposing upon the landlord the obligation to remedy code violations only in the basement portion of the leased premises also imposed upon the landlord an obligation to ensure the tenant's use and enjoyment of the entire premises. Accordingly, the landlord's failure to remedy code violations in the basement area and the municipality=s order requiring the tenant to vacate the premises, breached the landlord=s contractual obligations owed to the tenant and constituted a constructive eviction of the tenant as to the entire premises.

By this ruling, the New Jersey courts have extended its protections of commercial tenants by clarifying the extent to which a tenant can claim constructive eviction; particularly where only a portion of the tenant=s business premises are affected. Landlords should therefore be cognizant of the risks associated with lease provisions imposing upon the landlord the obligation to remedy municipal (or other governmental agency) code violations (beyond the fines and remediation costs), and should consider addressing such issues up front, contractually. However, because lease provisions shifting the burdens of compliance and remediation upon a tenant may be commercially impractical in today=s real estate market, landlords should, at a minimum, factor compliance costs into the negotiation of rental costs with the tenant.

Mr. Singer concentrates in the areas of complex commercial litigation and professional malpractice involving the investment, development and sale/lease of real estate. Mr. Singer also is a licensed New Jersey real estate broker with over a decade of experience in commercial and residential real estate in New Jersey. He may be reached at mcs@saiber.com.

 
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