Who’s Got it Right? Court Finds Aging Corporate Center No Longer Holds Preeminence it Once Did and Was Not a Special Purpose Property

by: Thomas Olson
2 Jul 2019

ML Plainsboro LTD Partnership/Gomez v. Plainsboro revolved around the highest and best use of two lots located at 800 Scudders Mill Road in Plainsboro. When the two lots were built by Merrill Lynch from 1985-1994, it was designed to be a premier corporate campus. It featured an office building with a fitness center and cafeteria as well as a hotel and conference center on the adjacent lot. Merrill Lynch sold the property to ML Plainsboro Partnership, who then sold the hotel and conference center to a third party for a little over $25 million in 2004. Plaintiffs then sold the remaining property in 2007 for $107,000,000 and leased it back from the buyer. ML Plainsboro Partnership appealed the tax assessments on the property for the 2005 and 2006 tax years. During those years, Plainsboro Township assessed them at a value of $196,908,500 for the tax year 2005 and at a value of $199,542,460 for the tax year 2006. The assessments were based upon the theory that the structures which occupied the two lots were best used as a corporate campus. In their appeal, ML Plainsboro disagreed and said the highest and best use of the property was to use it as an ordinary office building since the amenities which once made the land prominent for a corporate campus no longer existed.

The determination of the highest and best use was crucial as to which method should be used to determine the value of the property. The plaintiff’s expert opined that the best method of determining the value of the properties was to lease the property to a single tenant. The plaintiff’s expert rejected the notion that property should be designated a “special purpose property” as a corporate campus and used the income capitalization approach in order to come to a conclusion that the property in the years 2005 and 2006 was worth $99,000,000 and $109,000,000, respectively. The defendant’s expert opined that the highest and best use of the property was as a “special purpose property” corporate center, and the best method to determine the value was the cost approach. The defendant’s expert opined that using this method the value of the property during the years 2005 and 2006 was $214,500,000 and $223,000,000.

The Tax Court, after considering the expert opinions for both parties,  found that the plaintiff’s expert had established the correct value of the property. The main factors in the court’s determination that the two lots were best used as a single tenant office building were the age of the amenities in the building, stating that they had gone from state-of-the-art to older outdated; secondly, that since the properties were detached from the hotel and conference center following the 2004 sale, a single-use tenant was more appropriate than a corporate campus. After determining the highest and best use, the court also determined which method of determining the value, the income capitalization approach or the cost approach, was the best method to determine the value. The court adopted the income capitalization approach. The court’s reasoning was two-fold: when valuing income producing property, the best method is typically the income capitalization approach and the buildings in their current condition were best suited for a single tenant user. The cost approach is best when a building is brand new and is being used as a special purpose building such as a corporate campus. The court determined that the corporate campus nature of the property had been negated by time and condition, and the property was just a large, ordinary office building.

In conclusion, the Court here found that a corporate campus which had aged over time and had become an ordinary office building was not a “special purpose” property requiring the use of the Cost Approach to value. The best method of determining the value was the income capitalization approach.

To read the decision, you can click on the link here.

The author acknowledges the assistance of William Olson, a summer intern at McKirdy, Riskin, Olson & DellaPelle, in preparing this article.  Mr. Olson is a member of the Day Class of 2021 at Rutgers Law School.