New Jersey Property Taxation: Challenging the Equalization Ratio

Article VIII of the New Jersey State Constitution regulates revenues raised through real estate property taxes. This directive, which has become known as the uniformity clause, mandates that all real estate within a municipality is assessed according to the same standard of value and taxed at the same tax rate. However, for the majority of New Jersey municipalities, in which properties are not assessed at 100% of true value, the use of an equalization ratio is necessary to ensure that county contributions are uniformly applied, even in cases where neighboring municipalities have assessed their properties at different ratios. Following a revaluation or re-assessment, a municipality will typically start with an equalization ratio of 100%. As property values increase in the years following a revaluation, the assessments do not change, but rather, the tax rate is simply increased to ensure that the rapidly increasing municipal budgets remain balanced. Properties owners who are overassessed are entitled to appeal their taxes not only when the assessments exceed the fair market values for their properties, but also in cases when the equalized assessments exceed the property values by more than 15%. In this article, we will examine a rather unique case in which the taxpayers of a town did not challenge their assessments, but rather the equalization ratio upon which their assessments were based.

In all New Jersey municipalities in which the equalization ratio has been applied, the assessor must estimate the ratio of assessed values to actual values. Some sales are immediately removed from the assessor’s computation. These sales are known as “non-usable sales” and include foreclosures, short sales, properties that have been damaged by fire or flood, sales between family members and several other categories of sales that very often do not represent true market value. Also included in the category of non-usable sales is a “catch all” category of sales that the assessor does not believe to be arms-length transactions. This category, known as “NU 26,” has been the subject of much debate due to its potential for abuse by an assessor who often cannot substantiate the reason for exclusion of a sale.

Recently, the equalization ratio in the town of Monroe, in Middlesex County became the subject of a claim by several property owners who wanted to appeal their assessments. The problem was that, based upon the equalization ratio that Monroe had calculated, the properties were not over-assessed. After careful review by the attorney for the taxpayers, it was observed that several of the property sales in town were erroneously tagged as “non-usable sales” by the tax assessor’s office.

The problem started in 2001 with an error by an assistant to the assessor, who was charged with the responsibility of categorizing sales. She had, however, apparently misunderstood the nature of the task. She consistently assigned the NU 26 tag to any sales in which she observed a “distorted sales to assessment ratio.” There was, in fact, no evidence that many of the transactions were not arms-length or market value sales. The practice of mis-designating sales continued until 2005, when the Tax Board compelled the town to revise its procedure. However, in causing otherwise usable sales to be designated as non-usable, based upon a flawed procedure, the town of Monroe inadvertently caused the equalization ratio to appear much higher than it should have been, thus precluding several potential appeals from succeeding, and discouraging several other appeals from being filed.

Accordingly, the Taxpayers sought legal representation. Jeffrey Gordon of the firm of Archer and Greiner represented the taxpayers in the matter of Kean, Krzyzkowski, Rubenstein, and Giubileo v. The Township of Monroe, Et. Als. 25 N.J. 479 (2010). The Complaint before the Court was not without procedural hurdles. Rather than being filed in the Tax Court, the matter was filed in the Law Division of New Jersey Superior Court. The matter was eventually transferred to the Tax Court, where it was adjudicated. However, the Tax Court is without authority to change the equalization ratio of a town. Therefore, the only remedy available to the Court was to compel the town of Monroe to conduct its own revaluation.

N.J.A.C. 18:12A-1.14(b) established twelve criteria to determine when a revaluation should be required. Some of those criteria refer to the computations established by the Division study of sales ratio data. See also Totowa Borough v. Passaic County Bd. of Taxation, 23 N.J.Tax 466, 470-71 (Tax 2007). The twelve criteria include issues involving low equalization ratios (under 85%), large or segmented coefficients of deviation (over 15%), and long periods of time since last revaluation (more than 10 years).

While municipalities may conduct revaluations voluntarily, they seldom do so due to the expenses and labor entailed. Furthermore, as noted in the matter of Freehold Borough v. WNY Properties L.P./Post & Coach, 20 N.J. Tax 588, 607-08 (Tax 2003) , revaluations may often have negative political consequences caused by substantial changes in the assessments of some residents. Therefore, municipalities often need to be compelled to conduct a revaluation, pursuant to N.J.S.A. 54:3-13. See Bergen County Bd. of Taxation v. Borough of Bogota, 114 N.J.Super. 140, 275 A.2d 158 (App.Div.1971).

The Monroe Township result will undoubtedly lead to budget shortfalls and substantially higher taxes for some residents as the town attempts to recover from the damage caused by the error in their equalization computation. The more enduring consequence of the Court’s decision, however, may be challenges to the equalization ratios of other municipalities. In the aftermath of Hurricane Sandy, which caused substantial damage to nearly every town in Ocean County, and most towns in Monmouth County, assessors will need to be even more diligent in determining which sales are usable and which sales are not usable for purposes of calculating the equalization ratio.