New Jersey office tax assessments impacted by declining market and declining ratios

By Thomas M. Olson, Esq. & Matthew J. Erickson, Esq., McKirdy, Riskin, Olson & DellaPelle, P.C.

New Jersey continues to lead the nation as the State with the highest average property taxes. This is especially true for many of New Jersey’s office properties. The effects of the pandemic, together with the current strong residential market, still linger in the area’s soft and uneven office rental market.

This is especially true for what used to be some of New Jersey’s property tax “crown jewels”, large single tenant corporate centers. Many of these centers have been shaken by the flight of large companies from the State while also being affected by many of the remaining companies looking to downsize their physical footprint in the state.

What is not getting downsized, however, is the property tax assessment on many of these large complexes. Those complexes, along with even many smaller office buildings, have been getting squeezed by the fact that many office tax assessments in New Jersey were set during revaluation processes that occurred before the effects of COVID hit the market. The result is office building assessments make up a disproportionate amount of the assessed tax base in many different municipalities that have not performed a municipal-wide tax revaluation since 2020.

This is made significantly worse by a New Jersey phenomenon that could be called a “ratio squeeze”. New Jersey has a methodology, known as “Chapter 123”, that attempts to equalize assessments by calculating and then applying the ratio between a municipality’s assessments and the true market value of the property. This is done by tracking the sales in a municipality and applying them to the assessments of those sold properties. Currently, dramatic increases in values from sales in the residential and industrial markets, compared against their pre-2020 low assessments, have driven many municipalities’ ratios significantly lower. This situation is exacerbated because, unlike some other States, tax assessments in New Jersey are subject to a single ratio in each town for all types of real estate, even though different types of real estate appreciate and depreciate at different rates over time.

For example, an office building that previously had an assessment of $64,000,000 may find its “equalized” value raised drastically year-over-year if there is a large drop in the municipal ratio. For example, a property assessed at $64,000,000 in a municipality with an 80% Chapter 123 ratio would have an implied true market value of $80,000,000. In a year where that municipality’s ratio drops to 60% would find the implied true market value increasing to over $100,000,000; a valuation that most likely could not be obtained in the real estate market. This means that, while the office market, particularly in urban cores and suburban areas, has generally seen values decrease, the implied market value of an assessment which is not changed, but is instead subject to a lower equalization ratio, actually increases.

This is currently happening in many municipalities where office buildings and office complexes continue to carry the property tax burden, even though their real market values have crashed in the past five or six years. This “squeeze” is itself driving down the actual market value of these properties as the ever-increasing tax burden makes it harder for owner-occupants to afford the property, and for owner-lessors to market the property to prospective tenants. This has caused a decrease in rents in order to entice lessee interest.

Going forward, we see this squeeze increasing, at least until each municipality reassesses or revalues all of their properties to be in line with the current soft office market. A drop in the current residential market could slow this squeeze from increasing, but that would only limit future damage to the office sector.

The remedy for office owners? Vigilantly check both your tax assessments and your municipal ratios every year and file a tax appeal when you are unfairly assessed. By carefully monitoring the situation, property owners and managers can minimize the chances that their New Jersey property tax assessments don’t result in tax burdens that are either unsustainable, or unfairly high, or both.

Thomas M. Olson is a partner at McKirdy, Riskin, Olson & DellaPelle, P.C.

Matthew J. Erickson, Esq. is an attorney at McKirdy, Riskin, Olson & DellaPelle, P.C.