South Jersey Commercial Real Estate Today

Property Tax Appeal Q&A: Harry Renwick, Part II

Chris Hogan — Thu, 25 Feb 2010 15:30:00 -0500

To file a property tax appeal, or not to file, that is the question. (Apologies, again, to William Shakespeare.) April 1^st is the deadline for most property tax appeals in New Jersey. (May 1^st if the municipality is undergoing a revaluation in 2010.) With April 1^st fast approaching, it seemed like a good time to check in w/ Harry Renwick of Renwick and Associates.

As you will see, Harry has spent close to 50 years as a professional real estate appraiser and has extensive experience w/ real property tax appeals in New Jersey. (Full disclosure: my office does use Renwick and Associates as an expert in property tax appeals and we are proud to do so.) I felt that his perspective on tax appeals would be helpful to any property owner or manager who has decided to file a tax appeal or is considering it. Harry graciously agreed to participate in a Q&A session w/ me. Because of the amount of information, the session has been broken down into 2 posts. This is Part II. You can read Part I of the Q&A here. (The highlighting in the answers was done by me.) I hope that you find the following information useful:

Are there any important factors that should be considered in deciding whether to file a tax appeal? One of the most important things is to accurately define within which sub-market the subject property is competing. Once the appropriate sub-market is defined, you can then identify market data which are truly comparable to the subject property and, therefore, an appropriate basis for analysis. (Comparing apples to apples, rather than apples to oranges.) There are thousands of competitive sub-markets that may come into play and have to be considered when properly establishing a property’s value, making use of a qualified professional essential.

Another factor to consider is properly establishing a property’s “highest and best use” and the potential pitfalls in doing so. For example, it may turn out that an older, single-story office building at a high-traffic intersection has a higher/better use as a retail entity. In such a case, the filing of an appeal w/o expert assistance could result in a cross-appeal by the town and a higher property value and tax burden. (Beware of cross-appeals by the taxing municipality.)

What is a revaluation and how can it impact on prosecuting a tax appeal? A revaluation involves a periodic updating of all of the taxable and tax-exempt properties within a community. A revaluation generally serves 2 purposes. One purpose is to re-establish the current Market Value of all properties and their equitable share of the overall budget levies. Because property values become distorted over time by changing market conditions and other factors, this step is essential in order to insure equity within the system. (Make sure that each property carries its fair share of the tax burden.)

The second purpose is to stabilize the tax rate. Revaluation almost always results in a higher overall community value which when divided into the current levies will have a proportionate downward influence on the tax rate. To the surprise of many, stabilization of the tax rate typically results in greater amounts of revenue being raised for each penny of the tax rate. For example: Assume that a town’s total assessed value immediately before a revaluation is $500M. Each penny of a town’s tax rate is equivalent to one percent of the town’s total assessed value so, in this example, a penny from the town tax rate = $50,000.00 and each penny-increase would add another $50,000.00 in revenue to the town budget. However, if a revaluation resulted in a new total assessed value of $1B for the town’s taxable properties, then each penny of the town tax rate would result in $100,000.00 worth of revenue. In other words, depending on market conditions, a revaluation may enable a town to maintain or reduce the tax rate, which resonates w/ the public, while still increasing tax revenue.

Only in a revaluation year is the appeal deadline extended to May 1st as opposed to April 1st during a non-revaluation year. In a revaluation year the new valuation appearing on the tax bill (green card) is assumed to be an accurate representation of the current resale value of the property as of Oct.1st of the pre-tax year; that is not the case in a non-revaluation year.

Owners of commercial real estate should be wary of revaluations b/c towns usually tend to shift the tax burden to Class 4 properties, i.e., away from residential properties where the voters live!

What is an equalization rate and why is it important? A town’s equalization rate is used to set a property’s Market Value based on the town’s current assessment of it and determine the fairness of the assessment. (Remember: under the NJ tax system, the assessed value of a property is supposed to closely approximate the Market Value. However, Market Value can change over time whereas the assessed value typically remains constant until the next revaluation. The equalization rate is the mechanism used to translate the town’s current assessed value of the property into Market Value a/k/a as the Equalized Value.) The equalization rate, a/k/a the town-wide ratio to true value (Market Value), is a ratio established for the community by the County Board of Taxation through the sampling of usable (arms length transactions) current sales of properties across all property classes as they compare to the values established under the last revaluation.

Example: Assume that the last revaluation set a property’s assessed value at $1M and the town has an equalization rate of .50. In such a case, the Indicated Current Market Value (ICMV) of that property would be $2M. In other words, the town is really placing a value of $2M on the property for purposes of tax burden. Now, if the current appraised value of the property is lower than the ICMV – e.g., $1.5M – then a successful appeal may be possible. An appraised value at $1.5M w/ a .50 equalization rate means that the property should be assessed at $750K, not $1M. Obviously, an assessed value of $750K should ultimately result in lower taxes against the property.

What is an I/E report and why is it important? An I and E report is a request for income and expense information, sent out by the town assessor, to all Class #4 (income producing industrial, commercial or multi-residential) properties. The community has the right to request this information under the Chapter 91 laws and failure to comply can result in the loss of the right to appeal. [CBH note: failure to return an I/E report to the taxing municipality in a full and timely manner can subject an appeal to a motion to dismiss from the municipality.]
How and when do you think the South Jersey commercial market will rebound? Which segment do you think will rebound first? My crystal ball is no better than most of the professional prognosticators. Having said that, one thing is for sure: commercial always lags behind residential. I don’t foresee any uptick in commercial until excess residential inventory is absorbed. We also need to regain a normal balance between “new construction” inventory and “re-sale” properties. Absorption of residential inventory and a re-balancing between new construction and re-sale are sure signs of job creation and improved purchasing power. Job creation and improved purchasing power generally translates to increased office and retail demand. I hate to say it, but I don’t see improvement in commercial for another 2-3 years.
Final thoughts? Yes, the tax system in New Jersey is very difficult for the average taxpayer to understand. Many property owners enter into the appeal arena with the intention of lowering their total annual amount of tax and are surprised to find out that the only element that can be placed under appeal is the current market value as of the effective appeal date. An expert should be employed that understands the subtleties and vagaries of the tax laws and tax system and their impact on the valuation process. My recommendation is first to enter into a consulting arrangement in order to pre-test the probabilities of a successful appeal.

Thanks, Harry!

Equalized Value: Learn It Before Filing a Tax Appeal

Chris Hogan — Wed, 24 Feb 2010 17:31:29 -0500

If you own CRE in NJ, how do you feel about your latest assessment? Given how bad the 2009 market was, many of you are probably looking at the assessment and thinking about filing a property tax appeal. (The appeal deadline is 4/1/10, unless there is a revaluation taking place.) That's good. Just know that in many cases the amount of the assessment is not an accurate indicator of the "true value" of your property and, therefore, not the number that should be considered. Instead, you need to know the Equalized Value for your property when deciding whether a tax appeal is warranted.

Many owners do not realize that the assessment amount on the Notice of Assessment (green card) may not necessarily reflect the true value at which a property is being assessed and taxed by the municipality. This can turn out to be an expensive misunderstanding.

Keep in mind that in NJ property taxes are supposed to be based on the fair market value (FMV) of the property and that the annual assessments are supposed to reflect the FMV of the property. However, as time passes between revaluations, that is often not the case. Between revaluations, assessments generally remain unchanged from year-to-year whereas market values are constantly changing. To address market fluctuations, each year the Division of Taxation analyzes current sales of properties across all property classes in a municipality as compared to the values established under the last revaluation. This results in what is known as a municipality’s annual Equalization Ratio (a/k/a Average Ratio) The Equalization Ratio for a particular municipality can be obtained from the assessor or County Board of Taxation. You can also find 2010 Equalization Ratios here.

The Equalization Ratio is used to translate the current assessed value of a property to its true assessed value a/k/a “Equalized Value.” The Equalized Value is supposed to reflect the FMV of the property based on the current assessment and county data. It is calculated by dividing the total assessment from the Notice of Assessment by the municipality’s Equalization Ratio.

For example, the 2010 Equalization Ratio for Linwood, NJ, is 61.99% whereas in Margate, NJ it is 84.28%. Thus, a $1M assessment in Linwood reflects an Equalized Value of $1,613,163.40 ($1M/61.99%). Meanwhile, a $1M assessment in Margate reflects an Equalized Value of $1,186,521.10 ($1M/84.28%).

Why is Equalized Value important? Because the Equalized Value tells an owner the true value at which the municipality has assessed the property and, in turn, is collecting taxes under the tax rate. Only by comparing the Equalized Value to the appraised FMV of a property can one begin to determine whether a tax appeal is warranted.

So, if you are still trying to decide whether to file a tax appeal, don't just look at the assessment, look at the Equalized Value of the property. (You should also talk to an appraiser and attorney experienced w/ tax appeals, because the "fun" does not stop w/ "Equalized Value" when pursuing a tax appeal.)

Property Tax Appeal Q&A: Harry Renwick, Part I

Chris Hogan — Tue, 23 Feb 2010 14:24:36 -0500

To file a property tax appeal, or not to file, that is the question. (Apologies to William Shakespeare.) April 1^st is the deadline for most property tax appeals in New Jersey. (May 1^st if the municipality is undergoing a revaluation in 2010.) With April 1^st fast approaching, it seemed like a good time to check in w/ Harry Renwick of Renwick and Associates.

As you will see, Harry has spent close to 50 years as a professional real estate appraiser and has extensive experience w/ real property tax appeals in New Jersey. (Full disclosure: my office does use Renwick and Associates as an expert in property tax appeals and we are proud to do so.) I felt that his perspective on tax appeals would be helpful to any property owner or manager who has decided to file a tax appeal or is considering it. Harry graciously agreed to participate in a Q&A session w/ me. Because of the amount of information, the session has been broken down into 2 posts. This is Part I. (The highlighting in the answers was done by me.) I hope that you find the following information useful:

Tell us about your background/experience and what Renwick and Associates does. 46 years as a professional real estate appraiser. I hold a Senior Certified General Real Estate Appraiser (SCGREA) license designation in N.J. I also hold a Certified Tax Assessor (CTA) designation in N.J. and I am a licensed real estate Broker. Our company specializes in litigation matters involving all types of real estate. We provide real estate consulting and appraisal services which place defensible valuations on property for the purpose of settling disputes in matters involving real estate. The disputes typically involve: real estate tax, federal income tax, eminent domain (condemnation), consumer fraud, insurance claims, economic (market) rent, equitable distribution of estates, bankruptcies, isolation of development rights etc. More information can be found at www.renwickandassociates.com.
In general, what is an appraisal? An appraisal provides a defensible estimate of a property’s value as of a specific date in time. The appraisal is based on a set of disciplines required under state law. The appraiser is attempting to analyze comparable lease, cost and sales data that would be considered by participants (buyers/tenants) in a defined market. The results of this analysis are then correlated in to a final estimate of value.
What role does an appraiser play in a property tax appeal in NJ? An appraiser performs an appraisal of the property and typically serves as an expert witness in support of the tax appeal if/when one is filed. (At Renwick and Associates, we provide a preliminary evaluation at no charge to give the client an idea as to whether an appraisal and appeal would be worthwhile.) When appealing an assessment, the taxing municipality will have the benefit of an “expert” in support of its position. The property owner is best served to have its own expert to combat the assessor’s position.
Can you provide us w/ your current take on the SJ commercial market? Anything of note in any of the following segments: multi-family; retail; or office? The current multi-family market is generally experiencing higher than normal vacancy and credit rates directly related to the limited number of qualified tenants and the disruptions in the market related to the recession and the need to attract new qualified tenants. Operating Expense ratios are also trending upward which has a dampening effect on Annual Net Operating Income. Retail and office properties are generally following the same trend except vacancy and credit losses are considerably higher due to an over supply of space and limited number of new qualified tenants. Capitalization Rates are trending higher within each market as a direct response to the higher risk presented within the recessionary market. This also has a diminishing affect on the internal rate of return from these investments. In short, things are tough in the South Jersey commercial market, especially in the retail and office segments.
Why can a property tax appeal be important in today’s economic climate? The tax laws in New Jersey and many other states employ a standard of Market Value as the basis for the equitable distribution of budget levies over the municipal or city tax base. Under the tax system, a property’s assessed value is supposed to closely approximate its Market Value as of October 1^st of the pre-tax year. In today’s economy, w/ sharply declining real estate markets, the assessed value of a property may no longer accurately represent the property’s Market Value. If the current assessed value is proven to be inequitably high, based on a current appraisal, then substantial financial relief may inure to the property owner.

In short: if it turns out that the current assessed value of a property is too high, a property tax appeal is the way to get it lowered and save the owner money. If the owner is not passing through the tax burden to a tenant in full, then a high tax level would reduce Net Operating Income which, in turn, reduces the value of the property. In addition, having tax levels on a property which are competitively high can drive away potential buyers or tenants.

Check back in a couple of days for Part II of the Q&A w/ Harry Renwick regarding property tax appeals in New Jersey.

Round-Up: Multifamily Insiders

Chris Hogan — Thu, 18 Feb 2010 12:31:34 -0500

If you own or manage apartments in South Jersey, I encourage you to check out Multifamily Insiders, which is a site dedicated to the Apartment Industry. There are a variety of resources on the site, including job and vendor listings as well as blogs and discussion threads. I seem to always find some useful/interesting information + there is a real sense of "community" building on the site. (Full disclosure: I have signed up to be a member of Multifamily Insiders but have no ownership interest or other financial interest in it and absolutely no involvement in running it. I just find it to be a useful site.)

Anyway, I wanted to pass along some recent blog posts from Multifamily Insiders which I thought you might find useful/interesting:

Pablo Paz, National Safety and Maintenance Instructor for NAA Education Institute, warns that apartment properties will be subject to the EPA's new Lead-Based Paint Renovation, Repair and Painting (RRP) Rule which takes effect April 22, 2010. For those unaware, among other things, the new Rule requires employees and contractors who perform any renovations, repairs, and painting in homes built before 1978 to be certified by an EPA-accredited training provider as to regulations and guidelines on how to work safely with lead-based painted surfaces. The training has to be completed by the April 22/2010 deadline. The post includes useful links to further information from the NAAEI and the EPA about the Rule and compliance.
Brent Williams has an excellent series of posts about the ugly, the bad, and the good (somewhat) that he was subjected to during the lease renewal process at his apartment complex. The posts contain excellent analysis and food for thought for all managers or owners. MORAL OF THE STORY: customer service and attention to detail add value to a property and are worth the effort.
On the topic of customer service, Eric Brown of the Urbane Lab has an excellent post on what he calls "Partnership Marketing" which, in this case, involves working w/ several businesses -- including local restaurants -- to provide custom shuttle service to residents at no cost to the property! (You may recall Eric Brown/Urbane Apartments from an earlier post on marketing via social media.) The free bus service clearly adds value to the property and it sounds like a real "win-win" for all involved. What kind of "Partnership Marketing" opportunities might be available to your properties that would help add value?

A New Way for a Garden to Add Value

Chris Hogan — Fri, 12 Feb 2010 15:11:14 -0500

Can a garden increase a commercial property's value? Sure, a garden adds aesthetic value, but how about to a property's bottom line? And, how about if the garden is on the side of the building?

Welcome to a concept known as a "Vertical Garden," a/k/a a Vegetal Wall, which was conceived by French scientist Patrick Blanc. (A couple of pictures of existing Vertical Gardens are included w/ this post.) I ran across the concept in the "First Look" section of the Winter/2009 edition of Development Magazine.

According to the article, Vertical Gardens contribute to reduction of greenhouse gas emissions and can also use recycled water, either from grey water from the building or recycled through the collection bay at the bottom. Proponents have also found that a building's insulating properties are increased dramatically.

HOW IT WORKS: A Vertical Garden is composed of 3 parts: a metal frame, a PVC layer and felt. The frame is hung on a wall or can be self-standing. It provides an air layer acting as a very efficient thermic and phonic isolation system. A thin PVC sheet is then riveted on the metal frame. This layer brings rigidity to the whole structure and makes it waterproof. After that comes a felt layer that is stapled on the PVC. The felt is corrosion-resistant and allows for uniform water distribution. Watering is provided automatically, 4-5 times a day, through a drilled hose running along the top of the Vertical Garden. Since there is no soil involved, the water must be supplemented w/ low concentrated nutrients through an automatic device.

According to the article, more than 200 Vertical Gardens have been installed around the world. A check of Patrick Blanc's website shows only 7-8 in the U.S. so far, including installations in Tacoma, WA, and Charlotte NC.

I have no green thumb, but I like the idea b/c it could reduce HVAC costs and it could differentiate the property from competitors.

The success of a Vertical Garden depends on using the right choice of plants according to the local environment. Anybody know what kind of plants might work best in South Jersey? :)

While a Vertical Garden can be of any dimension, it would seem that the highest return would be found w/ a larger building. Obviously, not every type of building would be a good fit, as I doubt that a "big box" would want a garden growing on the side of the building, but I would think that a mid-rise office or multi-family building would work, as would certain retail and public buildings.

Who wants to be the first to grow a Vertical Garden in South Jersey?

Is a Rental Renaissance Coming?

Chris Hogan — Thu, 28 Jan 2010 15:00:12 -0500

Here's a post by Dee Allomong of Let's Talk Property Management about the onset of a possible "rental renaissance" tied to the impending reset of option-ARM mortgages in the U.S. (Full disclosure: I am a member of Let's Talk Property Management but have no ownership interest in it and absolutely no involvement in running it. I find it to be a useful site.)

If Dee is right, and I think she is, the renaissance will be led by those suddenly finding themselves in the "sell to rent" group. Check out the graph in Rental Housing and Real Estate Market Trends for 2010 from PropertyManager.com, to which Dee also links. There is a mountain of option-ARM mortgages still to reset and we might not get to the other side until 2013.

So, we should expect a significant increase in the tenant pool, but is that a good thing for managers of multi-family properties? I'm not so sure. On the one hand, more tenants should eventually equal more demand, which is a good thing. On the other hand, won't many of the "sell to rent" group look for residential to rent first? Furthermore, won't there by credit issues?

The key to creating value from the "sell to rent" group will be found in screening and marketing. If you are a multi-family property manager, when is the last time your screening procedures were reviewed and updated? Are you able to identify the credit risks and proceed accordingly? Similarly, are you able to identify the cream of the crop from the "sell to rent" group? If so, what are the demographics and how can you reach them?

If anybody out there has reliable demographics on the "sell to rent" group and any experience in trying to reach it, please drop me a line.

Light Beer with My Whopper, Please

Chris Hogan — Thu, 28 Jan 2010 10:49:18 -0500

I have to pass along a post by Elaine Misonzhnik over at TrafficCourt about Burger King's plan to open so-called Whopper Bars at certain tourist-friendly locales. The Whopper Bars will sell beer! (Along w/ special BK fare with premium toppings.) It looks like the first beer-selling Whopper Bar is about to roll out in Miami Beach. I guess BK decided that the coffee market was too rough-n-tumble for it.

Frankly, I am of two minds about this development. On the one hand, as a guy who prefers BK and likes a beer w/ his cheeseburger every once in a while, the Whopper Bar is good news. On the other hand, I share Elaine's concerns that the alcohol could serve to drive away more consumers than it attracts, especially at night, and where is the value in that?

The Whopper Bar is a gutsy call, no question, but an understandable one. The burger market is saturated, consumer spending is still down, yet BK still needs to find a way to increase market share. When people do splurge, it is rarely at the same levels these days. Sometimes, a tasty "gourmet" burger with a beer at a reasonable price will do the trick. The Whopper Bar should be trying to reach consumers who can't or won't spend the time or money to grab a meal at a local restaurant, including chain restaurants like Friday's or Applebee's.

To me, the key will be in the execution by BK. Can it successfully market the planned boutique-like feel of the Whopper Bar in such a crowded field? If yes, fast-food and beer could be a formidable combination.

Anybody else thirsty?

NJ Tax Court: Witness Not Needed to Advance an Appeal

Chris Hogan — Wed, 27 Jan 2010 14:55:30 -0500

There was an interesting decision published by NJ's Tax Court the other day in the case of Princeton Alliance Church v. Mount Olive Township, Docket No. 014826-2009. Here's the skinny:

PAC filed an Appeal claiming that a part of its property was exempt from taxation b/c its use was partially restricted by virtue of the fact that it is located within the Highlands Preservation Area as defined by NJ's Highlands Act. (N.J.S.A. 13:20-1, et seq.) Before the Appeal was heard by the Board, PAC's attorney submitted a brief which included both a statement of facts and legal argument. In essence, PAC was arguing that the State has acquired a portion of its property by placing it within the Highlands Preservation Area so as to make that portion exempt from taxation under N.J.S.A. 54:4-3.3b.

Here's where things get interesting: on the date of the Hearing, PAC's attorney appeared w/o any witnesses to present. Instead, he indicated that there were no contested facts and sought leave to present legal argument in support of the Appeal. He was instructed twice to present his witnesses but, alas, he had none to present. The Board then dismissed the Appeal for lack of prosecution. PAC filed a timely appeal to NJ's Tax Court and Mt. Olive filed a Motion to Dismiss pursuant to N.J.S.A. 54:51A-1c.

In a well-reasoned decision, Judge Bianco denied Mt. Olive's Motion to Dismiss for lack of prosecution for several reasons:

Dismissal under N.J.A.C. 18:12A-1.9(e) for lack of prosecution was inappropriate b/c PAC's attorney had appeared for the Hearing. Under the regulation, dismissal for lack of prosecution is only available when the taxpayer fails to appear at all, which was not the case.
Mt. Olive's reliance on caselaw requiring a taxpayer to present "some proofs as to true value" was misplaced b/c the issue at hand was not valuation but, rather, exemption which makes the holding inapplicable. Moreover, even if valuation was at issue, the Board's dismissal for failing to call a witness would still have been unwarranted as there is no statute, regulation or caselaw that specifically requires a taxpayer to present witnesses in order to advance an appeal. (The evidentiary "proofs" required on valuation cases can be presented via cross-examination and documents.)
The Tax Board had an obligation to hear the legal argument from PAC's attorney under the applicable circumstances: PAC's property was only assessed at $153,000.00 meaning that it could not take a direct appeal to the Tax Court under N.J.S.A. 54:3-21. (The assessed value has to be over $750,000.00 for a direct appeal.) If the Board failed to hear legal argument on an exemption issue, PAC and similarly situated taxpayers would be left w/o a forum to contest its assessment because -- with an assessed value at $153,000.00 -- it could not be heard directly by the Tax Court.

PAC's decision not to present any witnesses was incredibly gutsy and ultimately rewarded. I'm not sure that the merits of its exemption argument are going to be equally well received.

Here's the moral of the story, from my point of view: if your appeal includes issues of value, get yourself an expert witness and bring him/her to the hearing, for gosh sake; if you're arguing only exemption make sure that you submit a brief with undisputed facts and argument and bring a copy of the above case with you!

Extended: NJ Permit Extension Act Goes to 12/31/12

Chris Hogan — Wed, 27 Jan 2010 13:06:46 -0500

NJ builders and developers can breath a small sigh of relief, as before leaving office former Governor Corzine saw fit to approve further extension of the deadline for expiration of permits and approvals covered by NJ's Permit Extension Act of 2008 (PEA). The further extension was accomplished on 1/18/10 when Governor Corzine signed Bill A-4347 (PEA Amendment) in to law shortly before exiting stage left.

The PEA covers most but not all state, county and local permits and approvals in place and valid as of 1/1/07 and originally extended the deadline for expiration of covered permits and approvals until 7/1/10. As amended, the PEA now pushes the expiration deadline back to 12/31/12. [Under the tolling provision of the PEA (N.J.S.A. 40:55D-136.4), which remains in effect, some permits and approvals may be good until 6/30/13, depending on the circumstances.] Also good news: the holders of covered permits and approvals are still allowed to seek further extensions beyond current PEA deadlines if authorized by other law.

Keep in mind that the PEA does not cover permits or approvals issued within an "environmentally sensitive area" among other exclusions.

Attached is a copy of the 1/25/10 Letter to Code Officials on the PEA Amendment from the DCA is attached. It addresses UCC permits but still does a nice job of clarifying how/when the PEA applies with the new deadline of 12/31/12. It could prove useful to owners and builders holding covered permits and approvals.

The extension to 12/31/12 is a good thing for beat-up developers and builders and responsible development needed to help NJ dig out from its current economic hole.

Local Press Round-Up

Chris Hogan — Wed, 27 Jan 2010 09:01:42 -0500

Here are a couple of articles from newspapers serving the South Jersey area that caught my eye over the weekend:

The first is by Diane Mastrull of The Philadelphia Inquirer about an upscale multi-family property in New York using a wastewater-recycling system designed, installed and managed by American Water, which is based in Voorhees, NJ. The name of the property is the Visionaire, located in Battery Park, which opened in September/2008 with LEED Platinum certification, the highest of the U.S. Green Building Council's sustainability standards.

The information about American Water's efforts to become more efficient and green is interesting, but what caught my eye was the fact that the owner's decision to use the system at a cost of nearly $2 million was an incentive from NYC: a 25% reduction in water rates. According to Russell Albanese of the Albanese Organization, developer of the Visionaire:

The city's rates have been increasing on average 11 percent a year, so the savings over time should become more significant.

The second article was from Erik Ortiz of The Press of Atlantic City about the generally still-bleak outlook for local malls and retail in Atlantic County, NJ. What caught my eye was the efforts by the new owners of Heather Croft Square to increase occupancy which apparently will include new frontage.

The moral of the stories for me: sometimes you have to spend money to make money.

UPDATE: NJ Assembly + Sub-Metering Bill

Chris Hogan — Thu, 21 Jan 2010 14:55:39 -0500

By way of update on an earlier post, it appears that the NJ Legislature failed to reach Bill A-1628 on 1/11/10 and the 2009 legislative session closed w/o the act becoming law. However, Senator Joseph F. Vitale has moved quickly to post Bill S-819, which is substantially similar to A-1628, although not identical, including some new definitions among other things. A copy of A-1628 can be found here and a copy of S-819 can be found here for comparison purposes.

Here are some of the highlights from S-819:

It specifically includes condominium and cooperatives as covered under the Bill.
It requires installation of a "water conservation device" before an occupant can be billed separately for water or sewage. It defines what constitutes a "water conservation device" for shower-heads, faucets and toilets.
The landlord/condominium/cooperative is responsible for reading the sub-meter and billing the occupant.
The occupants are to be billed on same billing cycle as the provider bills the landlord, etc.
The sub-meter must only measure consumption for the unit in question. In other words, the sub-meter can't measure any "common area" or like consumption.
Landlords, etc. still can't charge an administrative fee for costs in billing. Moreover, installation and set-up costs for the sub-meter also can't be charged to the occupant.
An occupant who fails to pay the sub-metered bill w/in the specified payment period -- which can be no less than 28 days -- can be assessed a late fee up to $25.00. (This is new.)
Water and sewerage charges subject to sub-metering are exempt from local rent control ordinances governing allowable increases.
As in A-1628, a landlord has to respond to an occupant's report of a leak w/in 24 hours. However, in a big change from A-1628, S-819 requires the landlord to repair the leak w/in 36 hours of notice. Further, this provision could be read to mean that if the landlord fails to meet either of those deadlines -- 24 hours for response/36 hours for repair -- the occupant shall be entitled to a credit as spelled out in this provision. (A-1628 gave the landlord up to a week to "substantially repair" the leak.)
The "billing dispute resolution" provisions found in A-1628 are not included.
On receipt of a sub-metered bill and w/in time for payment of same, an occupant may request that a person w/ expertise in installation and operation of sub-meters, and w/ no financial relationship to landlord, etc., test the sub-meter in question for accuracy. If the testing indicates that the sub-meter is inaccurate on the high side, the landlord shall pay for installation of a new sub-meter, pay for the cost of the test, and provide the occupant w/ a bill reduction and/or credit for the current and prior billing periods for the amounts overcharged. If the test of the sub-meter shows that it is accurate, the occupant must pay for the test and the landlord can charge him/her is occupant fails to pay for it.
Contrary, to A-1628, there is no restriction on when sub-metered billing on units not subject to rent control can be implemented, other than notice to the occupant, installation of the sub-meter and water conservation device and adoption of applicable rules by DCA. (A-1628 forced a landlord to wait until lease renewal.) The restrictions from A-1628 concerning units subject to rent control are included in S-819.

We'll keep you up to speed on all developments concerning S-819.

D.C. Commercial Landlords Start Posting Energy Costs

Chris Hogan — Sat, 16 Jan 2010 10:34:49 -0500

According to the Washington Post, the time has come for Washington, D.C., commercial landlords to begin complying with the District's Clean and Affordable Energy Act. Under the Act, which was passed in 2008, starting in 2010 landlords overseeing more than 200,000 square feet of office space are required by law to record energy and water usage rates in accord with the benchmarks established under the EPA's "Energy Star" program and, by the end of 2013, all buildings over 50,000 square feet must be compliant.

Under the Energy Star program, buildings are assigned a rating from 1 to 100 based on how their energy efficiency compares with similar buildings in the country. A building's rating will eventually be posted online, but there is a 2-year lag so landlords that must start reporting in 2010 will not see building ratings posted until 2012. The lag in posting is intended to afford landlords the chance to install energy-efficient technologies, if they wish.

According to Cliff Majersik, Executive Director of the Washington, D.C.-based Institute for Market Transformation, D.C. was the first area in the U.S. to enact such a law. However, in December/2009 New York City passed a law that takes D.C.'s legislation even further by also requiring multi-family dwellings to record energy consumption rates.

Am I crazy for thinking that the required reporting and posting of energy ratings could be a good thing? I am mindful of the cost involved, especially for older buildings. However, if done right, can't some if not all of the money spent on improving energy efficiency eventually be recouped? I would think that a good Energy Star rating would be yet another way to distinguish a property from its competitors and add value.

Like most things "green," I suspect that more municipalities are eventually going to jump on this trend.

Deciding to Evict a Tenant: Art or Science?

Chris Hogan — Fri, 15 Jan 2010 15:58:47 -0500

I recently had a client who allowed a commercial tenant to fall behind close to $100,000.00 on rent obligations before contacting my office to file an action for possession (eviction). It was a classic albeit perhaps extreme case where the tenant's business had taken a bad turn, there was some money coming in on a sporadic basis and the tenant made repeated promises that it was going "to make things right." (Unfortunately, proving the adage that "no good deed goes unpunished," the tenant has turned the eviction in to a federal case -- literally -- which is still ongoing, but that is a story for another time.)

For many landlords, commercial and residential, deciding when to evict a tenant is more art than science. The existing tenant is the "devil you know," so to speak, and, like my recent client, many landlords are reluctant to let go. Moreover, the people on the front lines for the landlord have a feel for the tenant, the current situation and whether the tenant can get up to speed. However, there often comes a time when the cord must be cut. The question is when? A tough call, no question, since there is cost involved in finding a new tenant.

I encourage landlords to develop a hard/fast rule and live by it, e.g., file for eviction once tenant becomes "x" months late. Take the "art" out of the equation and focus on the "science." When setting the line before eviction, a landlord should figure out: how long the eviction process usually takes; and, the average length of time for finding a replacement tenant. The higher that number is in terms of months, the shorter the line should be.

REMEMBER: a space occupied by a non-paying tenant is the same thing as vacant space! The damage to the value of the property is the same.

NJ Assembly May Vote on Sub-Metering Bill

Chris Hogan — Mon, 11 Jan 2010 13:54:08 -0500

Bill #A1628, which would advance water conservation by allowing sub-metering of water and sewer service in rental housing across the state and has been long supported by the NJAA, has been posted for a vote in the New Jersey General Assembly for Monday, January 11, 2010. In brief, the Bill would allow for installation of sub-meters and billing of tenants for water and/or sewerage service used by their unit. Among other requirements, the use of sub-metering would have to be disclosed in the tenant's lease in a "clear and conspicuous" manner" and "in plain language" and the bills sent to the tenant would have to include certain specified information. As it presently reads, the Bill is fair and comprehensive. A copy of #A1628 in its present form can be found here.

The NJ Legislature is currently in what is commonly known as its "lame-duck" session and the Assembly has a number of bills posted for consideration on 1/11/10 so it remains to be seen what, if any, action will take place on #A1628 on 1/11/10. Yes, there would be an initial cost outlay. However, passage of this Bill would be a positive thing for apartment owners and managers in the long run, as it would enable them to better monitor, control and recoup costs for water and sewer. Let's hope that the Assembly gets to it and passes it and then it would be on to the New Jersey Senate.

Clarity in Construction Contracts Can Save Money

Chris Hogan — Thu, 07 Jan 2010 07:00:00 -0500

I ran across another post at Best Practices Construction Law blog that rings true for me. It concerns the benefit of clear/concise legal writing but also touches on need for attention to detail and the benefit of having legal counsel review construction contracts before the job starts. (An "ounce of prevention is worth a pound of cure" is a truism that has stood the test of time and applies squarely to construction contracts.) Matt touches on a couple of guidelines for drafting construction contracts and I agree with them all. One I would add: clearly define the draw schedule and documentation for same. In addition, although not substantive in nature, here are a few pieces of information which every contractor should require in its contracts and which are very useful if/when lien claim or litigation has to be filed in NJ:

Identify fully the contracting party on the other side and its interest in the property.
Identify current/best address for the contracting party. No PO boxes, if at all possible.
Identify as best as possible the location of the property, including lot and block if available.

The above information provides a great start for research that may be necessary before filing a timely Construction Lien Claim against a commercial property in New Jersey.

Property Managers Can Profit from Technology

Chris Hogan — Tue, 05 Jan 2010 07:00:00 -0500

Ran across some interesting survey results at The Property Management Blog from what seems like a relatively small sample. The results should come as no surprise but it is still nice to see confirmation that successful companies leverage technology to increase market share and efficiency; this is especially true of industry-specific, integrated software.

What I found interesting was the percentage of respondents who do not use technology to track on-line leads and the findings questioning the effectiveness of social media. By way of comparison on this last point, check out Eric Brown. According to Multifamily Pro, Eric has done great things with Urbane Apartments in the Detroit/SE Michigan area using only social media since 2004. So, maybe there is something to social media after all.

Here's another post from The Property Management Blog on the same issue; namely, using technology to increase value.

Green Building and Surety Bonds

Chris Hogan — Thu, 31 Dec 2009 07:21:55 -0500

I am a regular reader of the Best Practices Construction Law blog by Matt DeVries. If you work for a small business in the construction industry, I highly recommend that you check it out. Matt has an excellent sense of the issues -- legal and otherwise -- of interest to professionals in construction.

Recently, Matt provided an informative "guest post" from Kevin Kaiser of SuretyBonds.com about how green building is becoming increasingly more problematic for the surety industry. As noted in the post, many surety companies will not bond a contractor where any type of "green" or "energy efficiency" benchmarks must be met under the contract. The primary reason for the surety industry's reluctance to embrace green building: issues of risk management and liability.

If the contract calls for third-party certification -- e.g., by the U.S. Green Building Council -- who is liable if the building fails to meet the third-party's requirements? Your initial answer may be the bonded contractor, but what if the contractor does not have control over LEED certification? Interesting stuff.

The impact on contractors should be obvious: if unable to get bonded or if the bond cost is too high, then a contractor's ability to get the job and profit from it is dramatically diminished. My take: green building is here to stay in both the public and private sectors, the "friction" discussed in the post will be around for a while and it will be left to contractors to press the issues.

The key for contractors will be to have well-crafted construction documents clearly defining the following with respect to "green building" benchmarks: how will compliance be measured; who is responsible for meeting the benchmark; and the extent of liability -- e.g., monetary cap? Rebuild the entire building? -- if the benchmark is not met. This seems to be an area where contract ambiguity is not the contractor's friend.

Tenants and Landlords Working Together; Cats and Dogs Next

Chris Hogan — Wed, 30 Dec 2009 18:33:50 -0500

A nice piece from the tenant side of the fence by Andrew Zezas at the Corporate Advisor. Mr. Zezas, who is a tenant advisor, recognizes the perilous state of many landlords and talks about the merits of a "win-win" relationship between landlord and tenant, particularly in today's economy. Amen! Here's a sample:

Interestingly, landlords are not perceived as a group that deserves anyone’s pity. However, given current global economic conditions, and those of credit and real estate markets, with many landlords holding on white-knuckled trying not to lose their buildings to lenders, if there ever was a time when landlords were entitled to anyone’s sympathy, now would be that time. The government and business communities must recognize the challenges commercial landlords currently experience, along with the on-going struggles that most of them will endure over the next few years. If not, the tenants we advisors and brokers represent may have fewer stable leasing opportunities, and therefore, they may have much bigger problems!

I could not have said it better myself. Here's some more well-reasoned insight from Mr. Zezas:

Landlords and tenants would do well to consider their relationship with tenants as one of interdependent partners, instead of transactional opponents. The true recognition of interdependence between landlords and tenants is that without mutual benefit, the relationship simply won’t work. A landlord with no paying tenants achieves nothing. A tenant without a building to rent would have no place to conduct its business, and would likely be forced to divert capital from investment in its own profit generating ventures to real estate ownership.

In short, finding a "win-win" solution to leasing issues is more important than ever as the CRE industry rises slowly from its knees. Amongst landlord clients, this has resulted in a fair amount of soul searching in order distinguish between "wants" and "needs" and get a fair lease signed. For example, they may "want" a more aggressive calculation or a broader definition of Additional Rent, but do they "need" it, right now? (Rent rolls are built one tenant at at time, after all.) Hopefully, as suggested by Mr. Zezas, the same thing is taking place on the tenant side and we can start filling some more space.

Smart Phones and Commercial Real Estate

Chris Hogan — Mon, 28 Dec 2009 12:44:39 -0500

Check out this article by Elaine Misonzhnik of Retail Traffic about how consumers can leverage smart phones while out shopping. Very interesting. Personally, I do a terrible job of using my smart phone but I am smart enough to know that this kind of leveraging is the wave of the future and will only increase. So sayeth Steve Jobs.

Initially, I thought the news was going to be all bad for retailers, with examples of consumers standing in store aisles but ordering merchandise on-line. However, while on-line sales are undoubtedly a clear and present danger to store sales, I soon realized that the news is not all bad for a couple of reasons:

First, for the most part, in order to leverage the applications discussed in the article, the consumer has to already be at or near the store, which is half the battle for retailers. (I bet most successful retailers like their chances once people come through the door.)

Second, at least so far, it looks like consumers are using the smart phone applications primarily to help with comparison shopping on "big ticket" items.

Third, and perhaps most important, savvy retailers can embrace the technology and leverage it themselves. For example, as noted in the article, a retailer who provides data for use in the ShopSavvy application by Big in Japan gets an opportunity to lure shoppers with sales and can purchase different add-on services to provide it with a competitive advantage.

I agree with the sentiment expressed by Alexander Muse of Big in Japan: smart phones and the Internet are here to stay and have changed the rules of engagement for retailers. The sooner that retailers take advantage of the new rules, the better.

Commercial Real Estate: Value Is In the Eye of the Beholder

Chris Hogan — Sat, 26 Dec 2009 15:18:35 -0500

I started this Blog to talk about the various issues -- legal and otherwise, new and old, tangible and intangible -- that collectively have an impact on the value of commercial real estate (CRE). There should be a lot to talk about, as it goes without saying that the concept of "value" in commercial real estate can mean different things to different people at different times. Just ask the fine people of Pontiac, Michigan.

The fact that there are so many "moving parts" to the value of commercial real estate, no matter the size of the property, is both fascinating and challenging to me. The goal here is to start a conversation about value that goes beyond formulas and numbers and touches on the following areas:

How the definition of value can vary so much. In other words, exploring how, when and why one's "belief" in the value of a piece or type of CRE can change depending on one's seat in the worship hall and the time of the service.
The various "moving parts" affecting value in CRE and the small businesses that are taking best advantage of them.
The people that are talking about value in commercial real estate, whether they know it or not.
The “best practices” that are being developed and used by small businesses throughout the industry to create, increase or protect the value of commercial real estate.

So, welcome, one and all. Allow me to start the conversation with the following question: how do you define "value" in commercial real estate? I look forward to discussing your answers. As for me, I'll try to give you my answer to that question through the posts that follow.