Will it be strike 3 for cost estimating software in the NJ Tax Court? Stay tuned.

by: Anthony F. Della Pelle
12 Feb 2018

In a recent decision, ML Plainsboro Ltd Partnership v. Township of Plainsboro, the Presiding Judge of the New Jersey Tax Court denied a taxpayer’s motion to strike the opinion of the municipality’s appraiser who relied upon cost estimating software to determine reproduction costs as part of a cost approach analysis.   While this would appear to be a break from two opinions by different Tax Court Judges in 2016 that called into question the reliability of this type of software, the Judge denied the motion without prejudice and will revisit the issue.  The Presiding Judge noted that the two earlier cases were decided after the submission of briefs on the motion before him and he invited further briefing to address those earlier decisions.

In the first case, the township’s appraiser used automated valuation software to generate cost estimates but did not produce any independent testimony to authenticate and explain the calculations. Without being able to “ascertain the underlying data, basis, or reasoning in the generation of such estimates” the Tax Court Judge held that he had no way to “gauge the accuracy or reasonableness of the estimates.”  A copy of Forsgate Ventures IX, LLC v. Twp. of South Hackensack, 29 N.J. Tax 28 may be found here.

In the subsequent decision, another Tax Court Judge found that the replacement cost analysis offered by the appraisers for both the taxpayer and the borough that relied on a commercial cost estimating service, lacked credibility. The Judge found that neither expert provided any independent testimony to corroborate the calculations produced by the software and as such she could not “determine whether the estimates . . . were accurate and reasonable.”  A copy of Palisadium Management Corp. v. Bor. of Cliffside Park, 29 N.J. Tax 245 may be found here.

For decades, appraisers have used cost estimating services to provide data and calculations. Initially these services provided appraisers cost manuals, but over time the estimates were generated using computer software.   Some have argued that the Forsgate Ventures and Palisadium Management decisions unnecessarily increase litigation costs.  This argument goes that reliance on such software is common in assisting appraisers in forming their opinions of value.  The independent corroboration sought by the court will require additional time and expense and runs contrary to the admonishment by the Supreme Court in Glen Wall Associates, v. Township of Wall, 99 N.J. 265 (1985) that “[a]n expert should be expected to support his opinion with as much documentation as necessary, but within realistic and practical limits.”  There the Supreme Court also reminded the Tax Court to “be mindful of the time and money both taxpayers and municipalities must spend litigating these actions.”

But on the other side, the concern is that the appraisers are simply inputting data into a “block box” that spits out an estimate and that there is no analysis or understanding of the data inputs.

Both Forsgate Ventures and Palisadium Management are on appeal.  Perhaps the Appellate Division will find that the software generated estimates may be reasonably relied upon.  If not, and the appellate court upholds these opinions, maybe it will strike a balance between the court’s demand for corroborating evidence and the escalating litigation costs.  Until then, practitioners are confronted with Tax Court Decisions in Forsgate Ventures and Palisadium Management and await the outcome in ML Plainsboro. The question is, will the Tax Court’s Presiding Judge throw strike three to the use of cost estimating software in the Tax Court or provide hope that appraisers will again be able to rely on such services without having to corroborate those estimates?  Stay tuned.

A copy of the ML Plainsboro Ltd Partnership v. Township of Plainsboro decision may be found here.