501. Basis of Real Property Value REAL PROPERTY ASSESSMENT

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501. Basis of Real Property Value REAL PROPERTY ASSESSMENT

Transcript Of 501. Basis of Real Property Value REAL PROPERTY ASSESSMENT

V REAL PROPERTY ASSESSMENT 501. Basis of Real Property Value
501.1 Statutory provisions. Every assessment of real property must be based upon some sort of appraisal. Numerous methods are available for apprais ing the value of real property. The selection of the proper method de pends upon the purpose for which the appraisal is made. For example, the value of a property for insurance purposes may not be the same as the value for investment purposes. In appraising a property for the purposes of tax assessment, the appraisal must be made in accordance with the basis of real property value recognized by State law, as in terpreted by the courts. 501.11 The standard of value. The State Constitution requires that real property must be assessed throughout the state according to the same standard of value. Statutes define the standard of value as the true value of the property. The statutes then go on to define true value as the price at which, in the assessor’s judgment, each parcel of real property “would sell for at a fair and bona fide sale by private contract on October first next preceding the date on which the assessor shall complete his assess ments. . REFERENCES: Constitution of New Jersey, Art. VIII, Sec. 1, par. 1. N.J.S.A. 54:4—1, 54:4—2.25, 54:4—23. 501.12 Taxable value. In each county, the county board of taxation has the power, on or before April 1 of the pretax year, to establish some percentage of

true value between 20 and 100 per cent as the level at which real property will be assessed and must remain in effect for a period of not less than 3 years. The percentage selected must be in a multiple of 10 per cent. When this percentage
figure applied to the true value of a property, the result is the taxable value of
the property. Note that the selection of a percentage of less than 100 per cent does not relieve the assessor of any responsibility for finding the true value of every property. True value must be determined in every case, with the as sessment representing the officially-declared percentage of true value. Once the percentage level is established, it remains in effect beyond the minimum three year period unless and until it is changed by the county board of taxation. If in
the first instance a county board of taxation had refused or neglected to set a per
centage level, the percentage level automatically became 50%. All twenty-one county boards of taxation have now selected 100% as the percentage of true value
which assessments are to be expressed.


REFERENCES: N.J .S .A. 54: 4—2.25 to 54:4—2.27. Judicial interpretations. The Constitution and the statutes provide some guidance for the assessor in establishing the bases of property valuation. Judicial interpretations of the statutes define further the methods which the assessor may use to arrive at a property value for tax purposes. The following principles have come to be generally accepted by the courts. 501.21 Willing buyer - willing seller. The courts have held that property must be assessed on the basis of the price, in terms of money, that it would bring in a private sale by an owner who is willing, but not forced to sell,


to a purchaser who is willing, but not forced to buy the property.

REFERENCES: N.J.S.A. 54:4-1, 54: 4—23. City of Newark v. West Milford Tp. , Passaic County, 9 N.J. 295 (1952); 88 A.2d 211. Gibraltar Corrugated Paper Co. v. North Bergen Tp., Hudson County, 20 N.J. 213 (1955); 119 A.2d 135.
501.22 Recognized approaches to value. Numerous judicial decisions have
recognized the validity of three methods for estimating the value of a prop

erty for tax purposes. (1) The Comparative Approach. This approach involves an analysis of the sale prices of comparable properties in an effort to establish the price which a subject property would sell for if it were put on the market.

REFERENCES: N.J.S.A. 54:4-1, 54:4-23. In re Erie R. System, 19 N.J.

110 (1955);

115 A.2d 89.

(2) The Reproduction Cost Approach. This approach is based upon a determination of the cost of reproducing a replica of the building at current

prices, and deducting from that cost a sum representing the depreciation or

loss in value resulting from the fact that the subject building is not new

and finally adding the land value which is separately determined, to the depre

ciated value of the building.

REFERENCES: N.J.S.A. 54:4—1, 54: 4—23. Town of Kearny v. Division of Tax Appeals, 137 N.J.L. 634 (1948); 61 A.2d 208, affirmed 1 N.J. 409 (1949); 64 A.2d 67.
(3) The Income Approach. This approach requires an analysis of the

income produced by a property in order to estimate the sum which a

person might prudently invest in the purchase of the property.

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REFERENCES: N.J.S .A. 54: 4-1, 54: 4-23. North Bergen Tp. in Hudson County v. 133 N.J.L. 569 (1946); 45 A.2d 623.





The courts have pointed out on occasion that approaches to value other than

the three listed above are known, but are not applicable to the problem of establishing property value for tax purposes. For example, the value of utility

property,. as determined for the purpose of establishing rates to be charged,

may not be considered the same as the value for taxing purposes.


N.J.S.A. 54:4-1, 54:4—23. Diorio v. Atlantic City Sewerage Co.,

20 N.J. Misc.




A.2d 26. Borough of Haworth v.

State Bd.

of Tax Appeals,


N .J . L.



40 A.2d 353.

501 .23 Approaches as indicators of value. While the courts accept

the three approaches as indicators of value, they invariably point out

that the result of a single approach, in itself, can never be accepted

absolutely as the true value of a property. Wherever possible, all three

approaches must be used and the final determination of value for tax pur

poses must be based upon the approaches as indicators, not determinants

of value.


N.J .S .A. 54: 4—1, 54: 4—23. Town ofKearny v. Division bf Tax






61 A.2d 208,

affirmed 1 N.J. 409 (1949); 64 A.2d 67. Co. v. City of Newark, 10 N.J. 99 (1952);

89 A.2d 385.

Aetna Life Ins. City of Trenton v.

John A.

Roebling Sons


24 N.J.



(1953); 93 A.2d 785. City of Passaic v. Gera





73 (1959);

150 A.2d 67.

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501.24 Stability of value. In a number of instances the courts have in dicated a belief that property value changes relatively slowly, and that values arrived at by one or more of the three approaches may not reflect the true value of the property. For example, in the comparative approach,
where sales of comparable property are used to estimate a value for the
property being assessed, abnormal market conditions of short duration have been held to bring about prices which do not really indicate the true value of the property. Similarly, abnormal construction costs or income conditions may cause these approaches to produce a value estimate for the property which the courts would not accept as indicating the
true value.
REFERENCES: N.J.S.A. 54:4—1, 54:4—23. City Holding Co. v. State Board of Tax Appeals, 127 N.J.L. 168 (1941); A.2d 289. Harborside Warehouse Co. v. Jersey City, 128 N.J.L. 263 (1942); 25 A.2d 291, affirmed 129 N.J.L. 62 (1942); 28 A.2d 91, certiorari denied 63 S.Ct. 763, 318 U.S. 769, 87 L.Ed 1140. City of Newark v. West Milford Tp., Passaic County, 9 N.J. 295 (1952); 88 A.2d 211. In re Erie R. System, 19 N.J. 110 (1955); 115 A.2d 89.
501.25 Property valued in condition .held. A property must be valued for tax purposes in the condition in which it is held by the owner on the as sessment date. For example, an assessment would be considered invalid if it were based on the anticipation that a department store, at some time
in the future might be divided into two buildings, each of substantially
reduced value because of being incomplete. However, the courts have
held in other cases that alternative uses to which the property
might be put while in its present condition should be considered

in arriving at a value.


N.J.S.A. 54:4—1, 54:4—23.

CBooirwouegllhvo. f AHbabwoottr,th42v.NS.Jta.Lte. B1o11ard(1o8f80T)a. x Appeals, 127 N.J.L.


(1941); 21 A.2d 309. Bamberger & Co. v. Division

of Tax Appeals

of Dept.

of Taxation

L. and Finance,

1 N.J.



62 A.2d 389.

501.26 Presumption of correctness. The assessor may be relieved to

find the courts invariably taking the position that an assessment, how

ever arrived at, is valid until proven incorrect. The burden of proof

initially is upon the “appellant” (see paragraphs 1103. 43 and 1104.44).


N.J.S.A. 54:4—1, 54:4—23. Aetna Life Insurance Co. v.

City of Newark,


A.2d 385. Appeal of Kresge—Newark,






N.J. 489

99 (1952); (1954); 105

89 A.2d

501.27 Assessments at the “common level.” The courts have in the past

ruled that in spite of the “true value” requirement
principal of equality of treatment and burden must may be sustained which is at a ratio to true value

of the law a dominant prevail. No assessment which is above the “common

level” of all assessments in the taxing district. In the absence of other evi

dence, the courts have accepted the average assessment-sales ratio determined

by the Director of the Division of Taxation for school aid purposes as the

“common level” for the district. More recently the Legislature by law established methods by which discrimi nation appeals are to be decided (see Section 1101.1 et seq.). A common level ratio for each municipality is published annually on April 1 by the Director
of the Division of Taxation. A common level range or corridor is calculated
at from 15% above to 15% below the common level so determined. Once the


hearing body (the county board of taxation, the Tax Court or the Appellate Division, Superior Court) in a discrimination appeal has determined the true value of the property under appeal, a ratio is struck between the assessed value of the property and the true value so determined. If the ratio so struck falls outside the common level range, or if the ratio so struck exceeds the county percentage level (see Section 501.12), the assessment of the property under appeal is adjusted by applying the common level to the true value as determined by the hearing body. In cases where the ratio so struck exceeds the county percentage level and where the common level also exceeds the per centage level, the revised assessment is determined by multiplying the true value fixed by the hearing body by the county percentage level. See Sections 1106.1 and 1107.1 for further information on tax appeal judgments at the

common level

REFERENCES: In re Appeals of Kents, Inc., 34 N.J. 21 (1961). William Kingsley, “The Kents Case - A Remedy for Assessment Inequality”, New Jersey Municipalities, February, 1961, pp. 4-8. N.J.S.A. 54:2—40.4, 54:3—22, (c.123, P.L.1973).

501. 3

Approaches to Value 501.31 The Comparative Approach. The Comparative Approach makes use of the sale prices paid in actual sales of real property in an effort to arrive at an estimate of the value of the subject property if it were placed on the market. The method sometimes is called the Market Data or the Sales Approach. Two important points must be kept in mind when

using the Comparative Approach:
(1) The sales must be boria fide. That is, they must represent sales
by a willing seller to a willing buyer. If, for any reason, the sale


is not considered bona fide, it should be disregarded. For example, a sale between two members of the same family probably would not reflect the true value of the property and should not be used for com parative purposes. A comprehensive list of non-usable types of sales has been prepared by the Local Property and Public Utility Branch for use in connection with the preparation of the Table of Equalized

Valuations for State school aid purposes.

(2) The sales must be of comparable property. If the property which has been sold differs in any substantial way from the property which is being appraised, adjustments must be made to compensate for the differences. Adjustments commonly are made for the date of the sale, to account for changing market conditions; the location of the prop

erty, to account for the relative desirability or undesirability of the

of the neighborhood; and the type of construction of the buildings.

The Comparative Approach is particularly useful for the appraisal

of land, where the adjustment of sale prices for differences is fairly

simple. The adjustments which muàt be made for buildings can be

much more difficult. The more specialized a structure, the less use

can be made of the Comparative Approach in estimating its value.

Handbook, par. 501.22,
Real Property Appraisal pp. 1-115 to 1—118.

502.11, 503.3. Manual For New



501.32 The Replacement Cost Approach. The Replacement Cost Approach

uses current bu.lding costs, and current standards of material and design

to arrive at an estimate of the cost of creating a building having the same

utility as that of the property under consideration. An allowance then is

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made for depreciation, so that the final value estimate will be applicable to the subject building. A value for the land is determined separately and added to the value developed for the building. This approach sometimes is known as the Summation Approach.
Current construction costs are available from a number of sources in terms
of cost per square foot or per cubic foot for various types of construction. The Replacement Cost Approach frequently makes use of cost conversion factors which indicate the trend of building costs over a period of time and for different locations. In order to facilitate the use of the Replacement Cost Approach, the Real Property Appraisal Manual for New Jersey Assessors has been issued by the Local Property and Public Utility Branch. The manual represents a complete compilation of real property cost data for New Jersey. All build ings and other kinds of real improvements are classified according to types arid uses. The classes represent the most common types of properties found in the state. Each class is graded from the poorest construction of its kind to the best. A unit cost, usually on a square foot basis, has been computed for each type of property that the assessor may face, thereby eliminating a great deal of computation. While the Replacement Cost Approach can be used for all types of structures, it is of no value by itself in valuing land. The assessor should note also that the cost of reproducing the building is not necessarily the current value of the building. Careful attention should be paid to the guides for estimating obsolescence and other forms of depreciation which are contained in the Real Property Appraisal Manual For New Jersey Assessors.

REFERENCES: HReaanldbPorookp,erptyar.Ap5p0r1a.i2s2a,l M 50a3n.u2a. l For New Jersey Assessors, pp. 1—63 to 1—112.
501.33 The Income Approach. The Income Approach requires an analysis of the income produced by a property in order to estimate the sum which might be invested in the purchase of the property. This approach to value is sometimes called the Capitalization
Approach. A detailed budgetary study must be made of the property. Gross annual income is either determined from actual figures or is estimated. Annual expense figures are obtained from the owner; rents, operating expenses, and fl.xed charges of the subject property are analyzed and adjusted.
The expenses then are subtracted from the gross income. The resultant
net income is capitalized at an interest rate which the investor in the property can expect as a reasonable return. The capitalized value of the net income represents the present value of the property by this
approach. By law, the assessor may require the owner of income-producing prop erty to furnish income data. IL the owner refuses, or if a false state ment is given, the assessor may value the property at that amount which
he has reason to believe it may be worth. The Income Approach is a complicated and advanced technique and should be used for assessment purposes only after a thorough understanding of the approach has been gained. Its primary use, of course, is in the appraisal of income-producing properties, such as stores, apartment houses, and other cases where the property itself produces the income.