ACC Focus on the New Jersey Chapter - October 12, 2009 (Print All Articles)

NJCCA President's Message

by Valerie Camara

To the Membership,

Well the month of September was very busy and flew by.

We started the month by delivering the backpacks we prepared as part of our Build-A-Backpack Community Service Project that were being donated to the Kindergarteners at McKinley Elementary School.

We had a flurry of activity going on behind the scenes in preparation for our Seventh Annual Full Day Conference on September 24th.  It was a jam packed day beginning with breakfast and a Career Development Networking Forum hosted by the Career Management and In-Transition Committee and ending a with a cocktail reception and performances by Natalie Toro and Matthew Friedman.  Our exhibit hall was lined with displays for the attendees to take in during breaks.  The programs ran from 9:00 am to 5:00 pm with four tracks having six programs running simultaneously, in addition we had a keynote luncheon address by Michael Chertoff and plenary session.

As part of the conference we launched our NJCCA social networking group on Martindale-Hubbell Connected with this goal in mind LexisNexis had kiosks set up to help our members sign on to website.

To actually make an event like our full-day conference happen, we engaged the help of over 40 sponsors to provide robust programming and an exhibit hall for sponsors to demonstrate and/or discuss the services that their company/firm provides to in-house counsel.  I would also like to thank on behalf of the board those in-house counsels that shared their perspective with us on the numerous panels we had.

To close out the year we have been scheduling a number of half-day programs for our members and putting the final touches on the agenda for our Annual Dinner Meeting on November 19th.  The evening will begin with an optional wine tasting at 5pm and then at 6:00pm a cocktail reception followed by dinner.  The evening will include in addition to our business meeting to elect new officers and board members, a cocktail reception with magic acts by two roaming performers, a keynote address by Frederick Whitmer, noted litigator and the author of Litigation is War, and a raffle drawing.  Look for your invitation to the Annual Dinner meeting later this month.

The board will also be hosting a face-to-face Committee Leaders Forum on October 7th at Merck's Corporate Headquarters in Whitehouse Station with all of our committee leaders.  The goal of the meeting is to share best practices across the committees with the hopes of invigorating our committees with an infusion of new ideas that might enhance the programming offered by the committees for our members.

There is still time to sign up for the ACC Annual Meeting in Boston, Massachusetts, which runs from October 18th-21st.

Thank you to all for your contributions to making this a productive month for NJCCA!

Valerie Camara
NJCCA President

The Proper Valuation of an Assisted Living Facility in a Property Tax Appeal: Liberty Manor v. Englishtown, New Jersey

Frank E. Ferruggia, Esq.
The Court decides that the proper valuation of an assisted living facility was the cost approach to valuation advanced by the taxpayer, and rejects the income approach utilized by the municipality.

The proper valuation of an assisted living facility was the subject of the recently decided Ruck, DiRubbio, and McCauley (Liberty Manor) v. Borough of Englishtown, N.J., issued by the New Jersey Tax Court after a trial in 2008. The case involved the Liberty Manor assisted living facility, located in the Borough of Englishtown. In this case, the Tax Court unequivocally favored a cost approach to valuation advanced by the taxpayer, and rejected an income approach utilized by the municipality.

Liberty Manor was constructed in 1999, with a portion of the building that pre-existed the 1999 construction being preserved and renovated at that time. The facility had 70 living units and was licensed for a maximum of 110 residents. The improvements contained a total of 50,350 square feet, a number agreed to by both the taxpayer and the municipality. There were 39 double occupancy units and 31 single occupancy units. Each unit had a bath and kitchenette, but no cooking facilities. The common areas were located in a renovated older portion of the facility. Those common areas consisted of a dining room where residents took their meals, a commercial kitchen used for meal preparation, and other areas where residents could socialize. There was also a basement area below the renovated older portion of the building which contained the mechanical systems of the facility. The property sat on 3.14 acres.

The tax years in issue were 2005 and 2006. Under New Jersey law, the proper valuation date for each of the relevant tax years is October 1 of the pretax year. Therefore, the relevant valuation dates were October 1, 2004 and October 1, 2005.

For both tax years in issue, the total assessment being challenged was $5 million, broken down into $278,300 for land, and $4,721,700 for improvements. New Jersey publishes an equalization ratio (the “Chapter 123 ratio”) based upon usable sales in the relevant municipality. For 2005 that average ratio was 55.21%, while for 2006 the relevant average ratio was 49.83%. Utilizing those ratios, the equalized total fair market value reflected by the assessments for 2005 and 2006 was $9,056,330 and $10,034,115 respectively.

Plaintiff’s appraiser utilized only a cost approach and testified that this approach was the only valuation methodology that was probative for ad valorem tax valuation purposes. The cost approach isolates the value of the land and the bricks and mortar that make up the improvements. Because an assisted living facility offers more than just “housing”—it offers meals; nursing and medical care; recreation activities—it is difficult, if not impossible to utilize an income approach that would necessarily have to isolate the rental value of the facility alone. An income approach that utilized the fees paid to residents would have the effect of incorporating into a final value conclusion the value of benefits and services that have nothing to do with the land and improvements. In essence, the Plaintiff’s appraiser testified, an income approach suffers from the potential defect that it is actually providing a value for the “business” of the assisted living facility, and not just the value of the real estate itself, which obviously is the object of the valuation exercise in the ad valorem context.

Plaintiff’s appraiser further testified that the sale approach would suffer from the same infirmities as the income approach. Sales of assisted living facilities are rarely if ever for just the real estate. Purchasers are buying the cash flow, actual or potential, generated by the bundle of services offered by the facility pursuant to its state license. Plaintiff’s appraiser testified that it would be virtually impossible to take sales data and attempt to segregate that portion of the sale price that applied solely to the value of the real estate itself, as opposed to the value generated by non-real estate revenue sources.

Employing the cost approach alone, Plaintiff’s appraiser researched and proffered four (4) land sales in order to determine a value for the underlying acreage. The land sales were for uses that conformed with the appraiser’s highest and best use conclusion—continued use as an assisted living facility. The land sales were analyzed on a per bed basis. The appraiser opined that “[t]his is the typical common denominator for this property type” in the market. Adjustments were made to the sales for time, location, size, and whether the sales were with approvals already in place or were contingent upon receipt of approvals.  He concluded a land value, after adjustments, of $10,000 per bed, for a total land value of $1,110,000 for each tax year in issue.

In order to determine the value of the improvements, Plaintiff’s appraiser utilized the Marshall and Swift cost estimator service. After deduction of 10% for all forms of depreciation, the addition of a 10% entrepreneurial profit factor, and consideration of the land value, Plaintiff’s appraiser concluded a total value for the subject property of $5,750,000 for 2005 and $5,990,000 for 2006.

Defendant’s appraiser rejected the use of a cost approach. He indicated that his research produced no “recent land sales that were purchased for improvement with Assisted Living facilities or were zoned for that usage.” (Defendant’s Appraisal, p.26). Further, he opined that a replacement cost estimate could not be derived because he “was not provided an as built plan for the Facility, showing accurate dimensions with which to use in a replacement cost estimation of the improvements.” (Id.)

Defendant’s appraiser also rejected the use of the sales approach, since his research disclosed no sales of assisted living facilities which took place “during the past three years.” (Id. at p. 27).

Defendant’s appraiser relied solely upon the income approach. He utilized the total revenue from the operation of the facility, but made deductions for “the depreciation of personalty” and a “return on personal property”. He also made a deduction for “Business Value” and equated that factor with a management fee of 5% of operating income.  He otherwise made no effort to segregate what portion of the revenue was strictly attributable to a rental of the physical premises, and what portion of the revenue was attributable to goods and services that had nothing to do with real estate.

Although the municipality’s appraiser used the facility’s reported income in his income approach, he rejected the actual expenses reported by the taxpayer. Instead he utilized the expense ratios of an industry consultant survey of seven (7) anonymous assisted living facilities located in New Jersey. He opined that “[w]ith this quality of research available, it is the appraiser’s opinion that it is reasonable to apply the expense percentages of the regional industry ‘norms’ as reflected in the survey…” (Defendant’s Appraisal, p.34).

Defendant’s appraiser concluded a fair market value, using only the income approach, of $8,644,707 for tax year 2005, and $8,644,700 for tax year 2006.

The Tax Court, in deciding for Plaintiff and awarding a substantial reduction in assessment for both years in issue, cast significant doubt on the use of the income approach in the assisted living context.  The use of the survey data to develop an expense ratio was fraught with imprecision. “Defendant’s appraiser had very little knowledge of how the survey data had been obtained and no knowledge at all of the facilities participating in the survey other than their location.” (Court’s decision, Transcript at p.25, lines 8-11).  The Judge also cited to a previous New Jersey Tax Court decision, Twin Oaks v. Morristown, 9 N.J. Tax 386 (Tax 1987), aff’d o.b. per curiam, 11 N.J. Tax 94 (App. Div. 1989), certif.. denied, 117 N.J. 155 (1989) in holding that a cost approach was the most appropriate valuation methodology in the context of a tax appeal involving a nursing home.

Using Plaintiff’s cost approach, the Court came to certain value conclusions. With respect to land value, the Court placed more emphasis on land Sale One. That comparable sale was of a 6.13 acre parcel in Wall Township in Monmouth County, New Jersey. It had approvals in place as of the time of the sale for development of a 110-bed assisted living residence. The sale occurred in November 2001 for a price of $1,950,000 reflecting a price per approved bed of $17,727 before any adjustments.  Plaintiff’s appraiser had made adjustments of negative 5% for location (the sale was on a more visible location than the subject); negative 5% for size (the subject was half the size of the comparable; and negative 5% for approvals being in place at the time the comparable sold. As adjusted, the indicated sale price for Sale One was $15,068 per bed. The Judge concluded a land value for the subject property of $15,000 per bed for a total of $1,650,000.

Finally, the Court approved of the Plaintiff’s use of the Marshall and Swift cost methodology, and particularly Plaintiff’s use of the “good” class of construction costs. Although the property was located in Monmouth County, the Court felt that the proper local multiplier to use was the Middlesex County multiplier of 1.24, rather than the Monmouth one of 1.12, given that the subject was very close to the Middlesex border and appeared to be part of the Middlesex “market”. Given the age of the construction, and that the older portion of the subject constituted only 20% of the overall improvements, the Court allowed only 7% and 8% depreciation respectively for each of the tax years in issue. Finally, the Court accepted Plaintiff’s use of a 10% entrepreneurial profit factor.

Based on these calculations, The Court concluded a full fair market value for the subject property of $6,890,000 for tax year 2005 and $7,180,000 for tax year 2006. Applying the average ratios published by the State of New Jersey for each tax year in question, the Court concluded an appropriate assessment for tax years 2005 and 2006 of $3,804,000 and $3,578,000 respectively.

The Liberty Manor case clearly stands for the proposition that in a property tax appeal case involving an assisted living facility, the cost approach is the more probative approach to ad valorem value. The cost approach, if researched and executed properly, clearly isolates the value of land and improvements and does not fall prey to incorporating “business value” into the calculation. The income approach, on the other hand, is fraught with peril. Utilizing the revenue stream from an assisted living facility to do an income approach to value will necessarily include revenue from activities unrelated to real estate, and will produce a value that is not reflective of the value of the pure real estate. Although the income approach has been successfully used in other contexts (e.g. hotels) where “business value” can be isolated and subtracted from the calculation, assisted living facilities may be quite different, dependent as they are in part upon government –subsidized daily fees and because their expense profile is a complex mix of health care, nutrition and recreation. Merely deducting a management fee and some factor attributable to FF&E (furniture, fixtures and equipment) may not be sufficient to clearly isolate the real estate of an assisted living facility from the other services provided to residents which produce a portion of the revenue. As Liberty Manor makes clear, the better approach is to utilize a cost approach if possible when valuing an assisted living facility for property tax purposes.

Frank E. Ferruggia is a partner in the Newark office of McCarter & English. He practices nationally in the field of property tax appeals and was the trial lawyer for the Plaintiff in the Liberty Manor case that is the subject of this article. The author would like to gratefully acknowledge the research assistance of University of Pittsburgh pre-law student Frank E. Ferruggia, Jr.

Mandatory CLE Requirements for New Jersey Attorneys

Phil Crowley
Mandatory CLE for NJ attorneys is just around the corner.

The NJ Supreme Court has issued new Court Rule 1.42 Continuing Legal Education, which will govern mandatory CLE for NJ attorneys (including those in-house counsel with limited licenses).

Basic features:
     24 credit hours over two years
     reciprocity with other jurisdictions' training
     includes 4 credit hours ethics/professionalism
     delivery permitted in-person or via Internet, videoconference, videorecording 

See the press release issued by the Court for the proposed rule and the administrative determinations regarding the CLE requirement.   (http://www.judiciary.state.nj.us/pressrel/pr091008a.htm#). 

The proposed rule will go into effect on January 1, 2010.You may wish to consider how this
will impact your internal budgeting requirements.

7th Annual NJCCA All Day Conference - Recap & Photos

5 Program Tracks, Lunch, a networking Cocktail Reception featuring Broadway Stars, Prizes, plus 8.5 NY CLE credits.

On September 24, 2009, NJCCA hosted its Seventh Annual Full Day CLE Conference at the Whippany Marriott, with over 215 people in attendance including our sponsors, in-house speakers and registrants.  The day started with breakfast and a Career Development Networking Forum.  We ran four tracks of programs with 6 different programs to choose from.  We were very fortunate to have as our keynote speaker, Michael Chertoff and a plenary session that explored alternative fee arrangements beyond the billable hour.  Our CLE programming ran from 9am to 5pm and was followed by a lovely cocktail reception with entertainment by Natalie Toro and Matthew Friedman, both of whom have been performing on Broadway.  Natalie was even able to get our own Evan Turtz to sing along with her.

Many thanks to our sponsors and the committee that helped to make this day a great success.

The below photos capture some of the day's events…

CONFERENCE PHOTOS

NJCCA Board Profile - Dana L. Gilbert

Our ongoing series profiling NJCCA Board members.

1. Tell us a little bit about your personal background:

   I grew up on a tobacco farm in Eastern North Carolina and moved to New Jersey after graduating law school (University of North Carolina) to pursue a career in corporate law.  There were few opportunities in the rural part of North Carolina where I grew up to do sophisticated legal work, so when given the opportunity to clerk in New Jersey in the summers during law school, I jumped on it.  I met my husband while working at a law firm and we now live in Basking Ridge, NJ with my two step-children (ages 10 and 13) and our 7 month old daughter. 

2. What was your first job?

   My first job was tagging clothing in the receiving department of a department store in the mall in Greenville, NC for $3.85 an hour.  Before leaving that job to be a part-time clerk of court (which I took only because it paid above minimum wage), I worked my way up to a sales associate position in which I sold shoes, jewelry and womens clothing and modeled fur coats and prom dresses in the store on the weekends.

3. What motivated you to become a lawyer?

   I was a business major in undergrad and had no interest at all in becoming a lawyer until one day during college while working at my part-time clerk of court job at the court house, I overhead a local street lawyer of only moderate repute disclosing his hourly rate to a client wanting to retain him to represent him on a DUI charge.  I thought to myself, “if that guy can make that amount an hour, I can really make money as an attorney!”  As fate would have it, when I sat down in my afternoon marketing class later that week, a classmate sitting beside me was filling out an application to take the LSAT.  He had an extra copy of the application, so I filled it out, sat for the LSAT the next month and did fairly well on it, so I decided it must be my fate to become a lawyer.
 
4. Tell us about your in-house experience.

   I went in-house 7 years ago at Cognizant Technology Solutions Corporation, a leading provider of IT services headquartered in Teaneck, New Jersey, with more than 65,000 employees in its development centers in India, the United States, China, Argentina and Budapest and on-site client teams.  I now serve in the role Vice President and General Counsel, North America.  I was the second attorney hired by the company and have helped grow our legal group from 2 attorneys to 18 attorneys located throughout the world.  Over the past few years, I have been primarily responsible for working with Cognizant’s business teams to negotiate the company’s IT outsourcing contracts and for assisting the company with a variety of legal matters, including SEC reporting and corporate compliance. 

5. What do you find most rewarding about your job? 

   I find it extremely rewarding to be part of a thriving international company where everyone has an entrepreneurial spirit.  When I started at Cognizant, we had approximately 4,000 employees with revenue of around $220 million.  We have now grown into a company with over 65,000 employees with revenue of around $3 billion a year.  I feel that my contributions to the company have helped it grow into the large, still growing organization that it is today.   I find it extremely rewarding to be in a position to directly contribute to the growth of the company, while helping to guide its policies and legal compliance.

6. Tell us about your position with NJCCA.

   I am a Board member and co-Chair of the International Law Committee.  In this position, I hope to be able to help bring information and programs of interest to our membership.
 
7. What do you find most rewarding about your association with NJCCA?

   The most rewarding aspect of my association with NJCCA is all of the opportunities that the NJCCA provides to get to know and network with other in-house professionals, such as the Spring cocktail reception, golf outing, annual dinner and all-day CLE conference.   I have also been rewarded by the opportunity to work with the wonderful people who make all of these events possible, from our officers to the directors, committee leaders, our Executive Director, program presenters and organizers, our sponsors and everyone who supports NJCCA and attends our programs.  The NJCCA works tirelessly to put on quality, affordable programs and take action on issues important to the in-house legal community of New Jersey.

8. What do you like to do in your spare time?

   In my spare time, I like to play golf and tennis with husband and my two wonderful step-children and spend time at the park with my 7 month old daughter.  Attending Gymboree classes is another activity I have recently taken up and am enjoying. 

9. Who would you most like to have dinner with?

   I know I should have a more clever response to this one, but honestly, the person I would most like to have dinner with is my husband (without our children).  I enjoy every minute I have to spend with him and, with a baby and two very busy kids at home, we do not get a chance to have a quality conversation very often these days. 

10. What advice do you have for new to in-house counsel?

   Be an excellent lawyer and advocate for your client, but do not over-lawyer the matters you work on.  It is a delicate balance.  Yes, you need to protect your company, but you also need to understand the business issues and opportunities involved and balance those against the legal risks presented (which are often theoretical risks).  Be practical and exercise common sense (skills not often taught in law school or law firms). Also, always under promise and over deliver.  If you can’t meet a promise for any reason, let the relevant people know that you will not be able to meet your commitment before the commitment is missed.  Finally, a wise old law school professor once told me:  “Be every bit the lady, while you strangle the other side’s throat.”  This simply means be courteous and polite to your adversary when possible.  This doesn’t always work and you often need to be firm and direct, but try charming first.  If you act practically, always exceed (or at least meet) expectations and are charming to your adversaries whenever possible, you will be the lawyer that business teams want on their deals and you will develop a great reputation in your company. 

Member Notes

A new feature, news about NJCCA members.

The Volunteer Lawyers for Justice's 4th Annual "Arts & Eats for Justice" Gala will be held on November 17, 6-9:30 at the Montclair Art Museum.  The New Jersey Corporate Counsel Association has two member notes associated with this event.

Elitza Meyer, Assistant General Counsel, Horizon Blue Cross Blue Shield of New Jersey, and a NJCCA Board Member, has been selected to receive Volunteer Lawyers for Justice's 2009 Volunteer Attorney of the Year Award.

Joe Aronds, Assistant Vice President and Assistant General Counsel of Hartz Mountain Industries, Inc., a member of the NJCCA Board, and the Cartoonist Emeritus of NJCCA, has donated that one of his Overruled! cartoons, "Plea Bargains," to be auctioned off as part of the silent auction at the November 17 Volunteer Lawyers for Justice Gala.

 

Please attend the Gala, and support Elitza, Joe and the ongoing good work of the Volunteer Lawyers for Justice. You may even walk off with an original law-related piece of art.

Volunteer Lawyers for Justice's 4th Annual "Arts & Eats for Justice" Gala on November 17, 6-9:30 at the Montclair Art Museum.  If you would like to attend the Gala, please use the attached Registration Form.

This is a new feature of the NJCCA Newsletter.  We welcome your contribution of any members award, promotion, new position, published article or other professional milestone.  Please submit those items directly to Giuliano Chicco, NJCCA Newsletter Editor. 

Upcoming NJCCA Events

Register today for these relevant and insightful events.