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Gayle Kitson Fredon Golf, L.L.C. v. Township of Fredon 2 is a problematic case. It involved a real estate tax appeal of the Bear Brook Golf Club which the court described as an 18 hole semi-private golf course. Gayle and Kitson utilized the income approach to valuation in which it calculated Bear Brook's fair market value by reference to nine leased golf courses. Its appraisal valued Bear Brook's going concern (land, improvements, personal property and business). At the close of plaintiff's case Fredon could have successfully moved to strike plaintiff's appraisal as an appraisal of the going concern and for judgment affirming the assessment. Instead it chose to call its appraiser who valued Bear Brook by means of the cost approach. Fredon's appraiser opined that since Bear Brook was a special purpose and limited market property the only reliable method of valuation was the cost approach. He utilized four land sales to arrive at his opinion of land value.
The court rejected the plaintiff's income approach stating: Furthermore, golf courses "are usually considered as special purpose properties; they are not so regularly sold or exchanged in the marketplace as most other properties. Karla L. Heuer, Golf Courses, a Guide to Analysis and Valuation 28 (1980). The court is satisfied that semi-private golf courses like "private nonprofit and municipal courses...usually do not generate sufficient income for return on investment,[and therefore, the] application of the income approach [to value] is often precluded". Id. at 102."[T]he income approach is seldom appropriate in appraising a private nonprofit club or a municipal course" Id at 107; this court finds no distinction with semi-private courses such as Bear Brook.3
The court stated that while it is clear to the court that the cost approach is the most appropriate valuation method for Bear Brook it nevertheless rejected Fredon's cost approach due to a lack of comparability of its land sales to the subject. (Three sales were deed restricted. The fourth was a post date sale.)
Thus notwithstanding that both parties testified to values which would have resulted in a reduction of the assessment, the court sustained the assessed value.
The significant operative fact in this case which was completely unnoticed by the court, and apparently by Gayle & Kitson, was that the plaintiff was a taxable for profit limited liability company (an "LLC") and daily fee courses are bought and sold by for profit companies solely on the basis of their cash flow both historic and projected. The distinction wasn't whether the court saw no difference between a semi-private, private non-profit or municipal course which do not have a profit motive. The distinguishing fact is whether the course is for profit or not for profit.
The defendant's appraiser's identification of Bear Brook as a "limited-market and special purpose property" since golf courses typically do not sell or lease is the product of fuzzy thinking.
There is a distinction between truly special use property (also called special purpose) and limited market property. The term "special use" excludes property for which there is a market. The cost approach is the sole method to be used in valuing special use property for tax assessment purposes. However "limited market property is not necessarily special use property. If a reasonably active, albeit limited, market is shown to exist, the property is not appropriately characterized as special use or purpose. 4
The Appraisal Journal, at 42 (January 1991) states that the "income capitalization approach to value can be the most reliable indicator of value for a golf facility especially for a daily fee course or other income producing property. Id at 42.
The cost approach is also a determinative of valuation method when a market exists for the subject property (only) when the income and market data (sales comparison) approaches prove unreliable indicators of value. Such was the case in International Flavors and Fragrances, Inc. v. Union Beach Borough. 5
Unlike non-profit country clubs for profit daily fee courses are limited market for profit courses. They do sell and they do lease. In 2004 the taxpayer, a real estate development company, purchased Bear Brook with the goal of building a club house, improving the golf course and eventually selling it.6 In 2008, it attempted to sell the property at an agreed upon price. The sale did not occur due to the buyer's inability to obtain financing 7 Gayle & Kitson testified to nine leased golf courses. Wolf Creek Golf Links, Inc. v. Board of County Commissioners 8 offers dramatic proof that golf courses do sell. Both the petitioner and the commission offered sales of golf courses in fact the county appraiser, in using the sales comparison approach testified to over 70 sales of golf courses throughout the United States. The matter was resolved on the basis of the sales comparison approach. Another court Sahalee Country Club, Inc. v. Board of Tax App. 22 9 pointed out that there is a nationwide market for golf courses. In the South Jersey area alone several daily fee courses have sold for that use. The fact that daily fee courses do sell and lease indicates they are limited market properties. Daily fee courses should be valued by the income approach. The cost approach method of valuation is not properly applied to the appraisal of daily fee courses because its underlying assumptions do not reflect the investment rationale of typical daily fee course buyers.
1 Mr. Roettger, who is Of Counsel to Cooper Levenson, Attorneys at Law, maintains offices in Cherry Hill, New Jersey. He is in the process of writing a comprehensive memorandum on this topic for publication in a national journal. 2 26 N.J.Tax 268 (Tax 2011) 3 26 N.J. Tax at 282. 4 Coastal Eagle v. West Deptford Tp. 13 N.J. Tax 242, 257 (Tax 1993) has an excellent discussion on this distinction. 5 21 N.J.Tax 403 (Tax 2004) also an excellent discussion on this issue. 6 26 N.J.Tax at 276.. 7 Id. 8 18 Kan. App. 2d 263, 853 P. 2nd 62 (Kan. Ct. of App. 1993) 9 108 Wash. 2nd 26, 357 P. 2nd 1320 (Wash. 1987).
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