Major Rule Update for Sellers of Commercial Real Estate
Plaintiff, One Main St. Edgewater, LLC (“Plaintiff”) contested the property tax classification for two of its properties located in Edgewater, New Jersey. Each property consisted of a six-story structure comprised of retail space on the ground level and residential rental apartment on the floors above. Both properties were classified as Class 4A commercial property (4A) by Edgewater’s tax assessor. Plaintiff asserts that the properties should have been classified as Class 4C apartments given its predominant use as multi-family residential apartments rather than as commercial. The parcels were currently under contract to be sold when the complaint was filed. The proposed reclassifications would remove the requirement for plaintiff to pay the additional fee prescribed under N.J.S.A. 46:15-7.2 (“Mansion Tax”).
The court found that the subject properties were incorrectly labeled Commercial 4A properties and should be reclassified as Commercial 4C properties. As a result, the Plaintiff saved nearly $2,000,000 in Mansion Tax payments.
Prior to Plaintiff’s complaint being filed, neither existing law nor case precedent addressed mixed-use properties in the context of property classification for local property tax assessment and state tax purposes. As such, the court’s decision was a matter of first impression.
After reviewing the prior Tax Court methodologies applied in related mixed-use contexts (i.e., farmland assessment, property tax exemption, use tax assessments and the controlling interest transfer tax), Judge Raffetto adopted the same standard applied therein, which is the “Predominant Use Test”. Thus, the court then found that the properties subject to the appeal were predominantly used as multi-family residential apartments rather than for commercial purposes. In support of its decision, the court (i) determined the ratio between the square footage of commercial units and residential units and (ii) the ratio of residential income and retail income for each property. For both properties, the retail square footage was less than 15% of the total square footage and retail income for both properties accounted for less than 15 % of the total income for the subject tax years.
This decision drastically affects the current deal market for buyers and sellers of commercial properties. For those in the middle of a deal, Sellers should confirm their tax classification and determine whether it aligns with its operations. Buyers should likewise review, as if they intend to sell in the future, they will also be assessed the mansion Tax. If a seller’s tax classification doesn’t align with its activities, then the cost of proceeding with the sale should be scrutinized. In this matter, the subject properties were assessed in total $52,142,850 and they made the smart play to challenge their classification.
For those that have already paid a mansion tax on property that more closely resembled mixed use property, there may be a way to collect a refund. However, each case must be analyzed individually, and no guarantee of refund can be provided.