NJ Tax Court Judge Slashes Megamall’s $3.3 Billion Assessment

Last year when I clerked for the Tax Court of New Jersey, my fellow law clerks and I had the privilege of attending a property inspection for American Dream Mall’s multi-billion dollar tax appeal. The mega-mall recently scored a huge legal victory as Judge Gilmore reduced the assessment by a pretty penny. Let’s take a closer look at the court’s verdict.

Background

At three million square feet, American Dream Mall is the second largest mall in the United States. It’s arguably the most unique as well, featuring everything from a mini golf course, ice rink, and amusement and water parks (did I mention a ski slope?) plus over 450 retail stores. Unsurprisingly, it wasn’t cheap to build. Construction cost roughly $5 billion, more than any other mall in the United States!

To fund this massive endeavor, the mall’s developers secured funding through various sources including municipal bonds and construction loans. A PILOT (payments in lieu of taxes) program was entered into whereby instead of paying real estate taxes, the developers would pay a small portion of what normally would be owed to East Rutherford and pay the remainder to a trustee for service of bond debt.

Development of this project was anything but smooth. The economic recession of 2007-08 brought construction to a halt. It stayed in limbo for years until it resumed in 2011. Eight years later in October 2019, the mall finally started opening in stages. Investors were optimistic, expecting $2 billion in income within the first year. But just as the mall was ready to welcome visitors, it got hit with another major setback: COVID-19. The global pandemic forced it to shut down just months into its grand opening.

When the mall finally re-opened, it got off to a slow start. Low sales figures, lawsuits, and injuries turned this American Dream into an American nightmare for Triple Five Group, the mall’s current owner. Whether the mall will become the profitable entertainment and shopping complex as originally envisioned remains to be seen.

Appealing the Assessment

Triple Five Group argued that American Dream was over-assessed. In fact, the mall’s assessed value exceeded the combined assessments of several high-profile properties, including:

• The Mall at Short Hills
• Westfield Garden State Plaza
• Willowbrook Mall
• The Shops at Riverside
• Six Flags Great Adventure

During the proceedings, the court recognized a legal uncertainty. Successful property tax appeals typically involve reimbursement for taxes already paid. But what about when a property owner makes PILOT payments and a portion goes to bondholders? Should a property owner be precluded from such reimbursement?

The court had a solution. It offered to hold an expedited trial for the 2025 tax year. If the assessment were reduced, the future PILOT payments could be adjusted for the remaining quarters of the year. The parties accepted and proceeded with the trial.

With that problem resolved, the court then addressed two key issues: (1) whether the valuation required deducting the cost to complete unfinished construction; and (2) the appropriate valuation method for the Amusement Park and Water Park.

Unfinished Business

In the court’s opinion, Judge Gilmore found that American Dream had several areas which remained unfinished. These include a movie theater, a performing arts center, and a large portion of retail space. All of these require significant construction to be utilized. In fact, the mall’s expert stipulated that it would cost $206 million! The court determined that a deduction for the cost to complete construction should be factored into the valuation.

Next, the court addressed the appropriate valuation method for the Amusement Park and Waterpark. Both of these are operated by the owner, making valuation based on the income approach problematic. The court settled on a hybrid method by valuing the other areas of the mall under the income approach and valuing the Waterpark and Amusement Park based on the cost approach.

Outcome

The court reduced the assessment by… drumroll please… $850 million!  Thanks to the verdict, Triple Five Group has a much lower tax burden, at least for now. However, municipal bondholders are not thrilled. These bondholders depend on PILOT payments tied directly to the mall’s assessed value. With investors already struggling to receive payments, this reduction is likely to deepen their concerns and fuel further tension.

To read the court’s opinion, click here.