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Providing quality representation for over 10 years. |
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The GALVIN LAW FIRM |
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Real Estate Taxation |
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Principal Attorney |
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By Dennis M. Galvin |
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As the world of real estate has evolved, New Jersey has seen the advent of Common-Interest developments such as Condominiums, Cooperatives and Homeowner Associations. All Common-Interest projects are developed in a fashion that allows many owners to share the cost of mutually beneficial services or common facilities. Some projects are elaborate, providing gyms, golf courses, security systems and even boat slips. Other are created simply to maintain a retention basin or conservation easement. Condominiums, Cooperatives and Homeowner Associations have significant differences which impact the real estate taxation of each form of ownership. This article will serve to give an overview of the methodology utilized to assess these Common-Interest projects for the purpose of real property taxation and related issues. CONDOMINIUMS Condominiums are governed by N.J.S.A. 46:8(b)-1 et seq.; and are thereby established by the filing of a Master Deed. Each Condominium unit owner possesses title to their unit in fee simple and acquires an undivided proportionate interest in all common elements and facilities. No individual actually owns land, in the traditional sense, not even under their own condominium. The Legislature enacted the following provision for the taxation of condominiums: All property taxes, special assessments and other charges imposed by any taxing authority shall be separately assessed against and collect on each unit as a single parcel, and not on a condominium property as a whole. Such taxes, assessments and charges shall constitute a lien only upon the unit and upon no other portion of the condominium property. All laws authorizing exemptions from taxation or deductions from tax bills shall be applicable to each individual unit to the same extent, they are applicable to other separate properties. N.J.S.A. 46:8(b)-19 Thus, the common elements of a Condominium are to be assessed to each individual unit and are not to be separated into a tax bill for the common elements and a tax bill for each individual condominium unit. However, there may be exceptions. In Tower West Apartment Associations, Inc. v. The Town of West NewYork, 5 N.J. Tax. 478, affirming 2 N.J. Tax.565, the Tax Court held that the parking garage was not set forth as a common was never considered to be part of the common elements. The garage was not set forth as a common element in the governing documents, meaning the Master Deed, or the in the By-laws of the Association. As such, neither the Association nor the garage were entitled to the protections of N.J.S.A. 46:8(B)-19. Tax Assessors should take note that the garage failed for three reasons: 1) the garage was not defined as part of the common elements in the Master Deed or the By-laws of the Association; 2) the garage was alienable; and 3) outsiders were allowed to make use of the facility. The Appellate Division affirmed the decision of the Tax Court. CONVERSIONS A trend during the Eighties was the conversion of apartment complexes to Condominiums. This process has had an interesting impact on assessments to the benefit of municipalities; the assessments increase. Apartments are assessed by means of the income approach; whereas condominiums use the market approach. In essence, the profit motive of the developer is captured by the municipality. In Schwan v. Township of Cedar Grove, 228 N.J. Super. 522 (App. Div. 16988), a challenge was made by a taxpayer to the above described market approach as to 16 protected tenancies. The Appellate Division upheld the methodology employed by the assessor stating that "[t]here was a change in status and form of the building from apartments to condominiums which was sufficient to involve the statute and require valuation of the units as separate entities." id at 527. The Appellate Division made clear that "[b]y virtue of N.J.S.A. 46:8B-19 conversions to condominiums are treated equally and are valued as separate units based on their valuation on the appropriate assessing date." NON-RESIDENTIAL CONDOMINIUMS The Condominium form of ownership is most commonly though of in a residential sense, but the Condominium form of ownership can also be utilized in recreational or commercial settings. In Fourmost v. Parsippany-Troy Hills Tp., 11 N.J. Tax 57 (1900), which involved the taxation of a stripmall, the Tax Court refused to distinguish Schwam, stating: The change in legal status to condominium ownership requires that the units be individually assessed. It is this change that imposes the requirement of a change in the assessment. To ignore the change in legal form of ownership and its effect on the market value of each unit in favor of apportioning the old assessment on the property among the units "would contravene the policy of this State to place condominium owners on the same legal basis, insofar as consistent with special problems of condominiums, as other owners of real property." Cigolini Associates v. Fairview, 208 N.J> Super. 654, 655, 506 A. 2d 811 (App. Div. 1986). HOMEOWNER ASSOCIATIONS Homeowner Associations, unlike Condominiums have no statutory guidelines for their taxation. Patrick J. Rowan, the author of Homeowner Associations and Planned Unit Development Law and Practice (1982 Matthew Bender), comments that "there is very little law in the area of Homeowner Association taxation." Id. At 14-1. He goes on the say "that the principal applicable to condominium units may be applied by the courts, by analogy to resolve real estate tax questions that relate to non-condominium units." Id. at 14-2. Homeowner Associations differ from Condominium Associations by the recorded instrument which is placed in the chain of title. Homeowner Associations are established by what is commonly referred to as a Declaration of Covenants, Easements and Restrictions. Each owner of a home automatically becomes a member of the Association. As such, each member has a right to use the common areas and also has a responsibility to pay their percentage of the cost to maintain those common areas. Unlike Condominiums, Homeowner Associations obtain their authority from the law of easements, not an act of the Legislature. An intricate web of benefits and burdens as developed by the law of easements creates a structure similar in most ways to a Condominium Association.___________________ 1 As part of a conversion of existing housing stock, N.J.S.A. 2A:18-11.22 gives senior citizens and disabled tenants a right to remain in possession of their apartment for forty (40) years if qualified. In Village of Ridgewood v. Bolger Foundation, 104 N.J. 337, 517 A.2d 135 (1986), the Supreme Court ruled that for purposes of real estate tax assessment, "the fair value of property subject to an easement appurtenant is reduced while the value of property benefitted therefrom is enhanced by the value of the easement." The Court defined an easement appurtenant by saying that "it is created when an owner of one parcel of property (the servient estate) gives rights regarding that property to the owner of adjacent property (known as a dominant estate). It enhances the value of the dominant estate which cannot exist separate from the land itself." Id. Both the Supreme Court in Village of Ridgewood and the Appellate Division in Prowitz v Ridgefield Park Village, 237 N.J. Super. 435 (App. Div. 1989), relied upon the following passage from Borough of Englewood Cliffs v. The Estate of Alison, 69 N.J. Super. 514 at 529, 174 A. 2d 631 (App. Div. 1961): It is immaterial for assessment purposes whether the fee-owner holds a title subject to a private easement for the benefit of a dominant tenantment, a public easement and a dedicated and accepted street, or public rights to use and enjoy a park under a charitable trust. In each case the land has been deprived of an element of value to be subtracted from the value of the fee. The possibility of adding that element in whole or part to other property, as in the case of a dominant tenantment is not the controlling factor. The assessor’s duty is to determine true value of the property being assessed; this should not include elements of value transferred to other parties or transferred to the community at large in the form of public rights. Based upon the fact that Homeowner Associations are easement -dominated structures, assessors must determine the value of both homes and common elements, making an appropriate adjustment for all easements either by reducing the assessment on the homes or common elements. To do otherwise will result in double-taxation. "Double-taxation is not invalid and yet the construction of the law which would authorize it is not to be adopted unless it is required by expressed terms of the statute or by necessary implications." Old Dominion D.N. and S. Company v. State Board of Taxes, 91 N.J.L. 179 (1917). As there is no statue prescribing double-taxation for Homeowner Associations, the "Old Dominion" Doctrine would prohibit a municipality from imposing double-taxation. Mr. Rowan in Homeowner Association-Planned Unit Development Law and Practice at Section 14.02, states "that double-taxation is a definite problem for Homeowner Associations;" and he offers the following suggestion: An alternative approach lies in the direction of giving the Association no tax bill or a nominal tax bill. This solution would not result in any loss of real estate tax revenues, since the value of the common facilities would be reflected in the value of a constituent homeowners property. The extent of this approach eliminates any possible double-taxation. In reviewing the law regarding the taxation of easements and Mr. Rowan’s comments, assessors should be careful not to tax homes at their fair -market value and the common property at its full value at the same time. To do so may invite costly litigation which will more than likely result in a tax reduction for either the Association or the Homeowner. COOPERATIVES Cooperatives are usually associated with converted apartment buildings as this has been their predominant use. In the Cooperative form of ownership the Cooperative Corporation owns all the land and improvements. The owner of units are mere stockholders receiving as part of their purchase shares of stock in the Corporation and a proprietary lease. There is no legislative enactment establishing a method for taxing the land and improvements of a Cooperative. However, in Berkley Arms Apartment Corp. v. Hakensack City, 6 N.J. Tax. 260 (1983), the Tax Court determined that the market approach was the correct method for determining the taxable value of a Cooperative. The Court valued all units based upon sales to outsiders. However, the Court discounted units purchased by tenants not qualifying for Senior Citizen and Disabled Tenancy Status, N.J.S.A. 2A:18-61.22, "because these tenants may stay for as little as three years or as long as eight years," N.J.S.A. 2A:18-61.11. The Appellate Division put their seal of approval on the use of the market approach for valuing Cooperatives in Southbridge Park, Inc. v. Borough of Fort Lee, 201 N.J. Super. 91 (App. Div. 1985), citing Judge Hopkins opinion from an earlier case with the same name as follows: Having concluded that the sale prices of the stock and proprietary leases are a predominant component in determining the subject property’s taxable value, it is then necessary to test that value to assure that it is fully attributable to the property and not the form of ownership. This should be done by ascertaining the replacement cost new as of the assessment dates. 4 N.J. Tax at 37. Both the Cooperative and Condominium forms of ownership have been utilized to convert apartment complexes. It is well-established that apartments are to be assessed by use of the income approach. Once converted, however, the Courts have held that these properties are to be taxed by utilizing the market approach. As to Cooperatives, see Berkley Arms and Southbridge Park. As to Condominiums, see Cigolini Associates v. Borough of Fairview, 208 N.J. Super. 654 (App. Div. 1986). TAX COLLECTION Condominiums are separately assessed. They are also separately liened and foreclosed as set forth in N.J.S.A. 46:8B-19. While this should leave little to the imagination, in Wynwood Condo. v. Twin Trees Dev., 250 N.J. Super. 510 (Ch. Div. 1991), the Chancery Division was faced with a conflict between two statutory schemes, meaning the Condominium Act and the collection of tax liens. In that case, the developer inadvertently transferred the land containing the common elements (drainage basin) to itself and failed to pay taxes for the lot. The Court found that the parcel belonged to the Association, that the unit owners should be paying their pro-rata share of the taxes as provided for by law, and that under the circumstances recession of the tax sale certificate was appropriate. As discussed, assessors can value Homeowner Associations in two different ways: either on the common elements or on the homes comprising the Association. If the full value is assessed to the common property it can be liened and foreclosed. However, individual home owners would not have their homes subjected to the lien. They would only suffer the loss of the facility. For these reasons a municipality would be well advised to pick up the value of the common elements of a Homeowner Association in the market value of the homes rather than in the common property . See Bonner ______________________ 2 In the conversion of apartments, Developers will commonly offer a lower price to tenants (insiders) in the hope that they will purchase their units, thereby increasing the number of units sold and eliminating the need to evict the tenant. Municipal Law Review/7 Properties v. Franklin Tp. P.B., 105 N.J. Super. 553 (Law Div. 1982). For additional guidance see the Municipal Land Use Law, specifically N.J.S.A. 40:55D-43, which would allow a municipality to maintain the common-lands of a planned unit development if an Association fails to meet its obligation. In accordance with N.J.S.A. 40:55D-43, a lien for costs are placed on the individual homes of the Association not the common elements. The exact language follows: The cost of such maintenance by the municipality shall be assessed pro rata against the properties within the development that have a right of enjoyment of the open space in accordance with assessed value at the time of imposition of the lien, and shall become a lien and tax on said properties and be added to and be a prat of the taxes to be levied and assessed thereon and enforced and collected with interest by the same officers and in the same manner as other taxes. Cooperatives, due to their nature, are only taxed once on the Corporations’s ownership of all land and improvements. This is true even though assessors consider the market value of each unit prior to determining the value of the Cooperative. Having only one bill is a blessing when paid and a curse when unpaid . If many shareholders failed to pay their maintenance fees to the Cooperative, the entire building can be liened and foreclosed; not a pretty picture for shareholders of a Cooperative. In fact, the payment of property taxes in one lump sum is of grave concern to Cooperative unit owners and is always a major concern prior to the purchase of such a unit. CONCLUSION The goal of this article was to give an overview of real property taxation of Common-Interest projects. Condominiums must be separately assessed in accordance with N.J.S.A. 46:8B-19. Homeowner Associations can receive two tax bills; one for homes and one for the common elements, but adjustments should be made to avoid double-taxation and litigation. Cooperatives are taxed utilizing the market approach and may cause unique problems to its owners. Even if the real estate market fails to recover its lustre, these types of projects are everywhere and while they make up important tax dollars for communities, failure to tax them properly may result in needless litigation or lost tax revenue. |
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