FELCOR SUITES LIMITED PARTNERSHIP, ) ) Complainant, ) ) v. ) Appeal Number 99-20205 ) MARY KING, ASSESSOR, ) ST. LOUIS CITY, MISSOURI, ) ) Respondent. )
DECISION AND ORDER
HOLDING
Decision of the St. Louis City Board of Equalization reducing the assessment made by the Assessor, SET ASIDE, Hearing Officer finds true value in money for the subject property for tax years 1999 and 2000 to be $12,450,000, assessed value of $1,992,000 (50% abatement).
Complainant appeared by Counsel, Lisa Demet Martin, St. Louis, Missouri.
Respondent appeared by Counsel, Eugene J. Hanses, Jr., Associate City Counselor.
Case heard and decided by Chief Hearing Officer, W. B. Tichenor.
ISSUES
The Commission takes this appeal to determine the true value in money for the subject property on January 1, 1999.
SUMMARY
Complainant appeals the decision of the St. Louis City Board of Equalization which increased the valuation of the subject property. The Assessor determined an appraised value of $17,600,000 (assessed value of $2,816,000, as 50% abated commercial property). The Board of Equalization increased the value to $28,757,500 (assessed value of $4,601,500, as 50% abated commercial property). A hearing was conducted on June 20, 2000, at the St. Louis City Hall, St. Louis, Missouri. Counsel for Respondent filed his Brief on August 7, 2000. Counsel for Complainant filed her Brief on September 7, 2000. Counsel for Respondent filed his Reply Brief on October 25, 2000.
The Hearing Officer, having considered all of the competent evidence upon the whole record, enters the following Decision and Order.
Complainant's Evidence
The following exhibits were offered into evidence on behalf of Complainant:
Exhibit A - Appraisal Report of Thomas R. McReynolds, MAI, State Licensed Appraiser, opining a value of $12,450,000.
Exhibit B - Written Direct Testimony of Thomas R. McReynolds.
Exhibit C - Marshall & Swift Commercial Estimator for Assessors' Form
Exhibit D - 1998 Host Report
Exhibit E - 1999 Host Report
Exhibit F- Letter dated 12/29/99 to Felcor from Starwood
Exhibits A through E were received into evidence. Counsel for Respondent objected to Exhibit F. Objection is overruled. See, Ruling on Respondent's Objection, infra. Exhibit F is received into evidence.
Respondent's Evidence
The following exhibits were offered into evidence on behalf of Respondent:
Exhibit 1 - Appraisal Report of Marty Hilgeman, Real Estate Appraiser for Respondent.
Exhibit 2 - Written Direct Testimony of Marty Hilgeman.
Exhibit 3 - Operating Data, 10/99.
Exhibit 4 - Operating Data, 9/99.
Exhibit 5 - 1998 Reconstructed Income and Expense Statement.
Respondent's exhibits were received into the record.
FINDINGS OF FACT
1. The subject property is located at 901 North First Street, St. Louis, Missouri. It is identified by locator number 23151. The property consists of a 57,814 square foot tract of land. The property is improved with a 9 story, concrete and brick, atrium hotel building containing 297 guest rooms, a restaurant, cocktail lounge, meeting rooms, indoor swimming pool, and other amenities. The building contains a gross building area of 344,950 square feet. It has 283 standard two-room suites, 10 executive two-room suites, 3 director's three-room suites, and 1 penthouse suite. The hotel is operated under the terms of a franchise agreement with Embassy Suites.
2. There was no evidence of new construction and improvement from January 1, 1999, to January 1, 2000.
3. Complainant's appraiser performed cost, sales comparison and income approaches to arrive at his opinion of value. The data and information relied upon by Mr. McReynolds conformed to the requirements of Section 490.065(3), RSMo. The evidence on this record establishes that the most appropriate approach to arriving at value is the income approach. The income approach developed by Complainant's appraiser was appropriate for the present appraisal problem.
4. Complainant's evidence was substantial and persuasive to rebut the presumption of correct assessment by the Board of Equalization and establish the true value in money as of January 1, 1999, to be $12,450,000.
CONCLUSIONS OF LAW
Jurisdiction
The Commission has jurisdiction to hear this appeal and correct any assessment which is shown to be unlawful, unfair, arbitrary or capricious. Article X, section 14, Mo. Const. of 1945; Sections 138.430, 138.431, RSMo. The hearing officer shall issue a decision and order affirming, modifying or reversing the determination of the board of equalization, and correcting any assessment which is unlawful, unfair, improper, arbitrary, or capricious. Section 138.431.4, RSMo.
Board of Equalization Presumption
There is a presumption of validity, good faith and correctness of assessment by the County Board of Equalization. Hermel, Inc. v. STC, 564 S.W.2d 888, 895 (Mo. banc 1978); Chicago, Burlington & Quincy Railroad Co. v. STC, 436 S.W.2d 650, 656 (Mo. 1968); May Department Stores Co. v. STC, 308 S.W.2d 748, 759 (Mo. 1958).
Standard for Valuation
Section 137.115, RSMo 1994, requires that property be assessed based upon its true value in money which is defined as the price a property would bring when offered for sale by one willing or desirous to sell and bought by one who is willing or desirous to purchase but who is not compelled to do so. St. Joe Minerals Corp. v. State Tax Commission, 854 S.W.2d 526, 529 (Mo. App. E.D. 1993); Missouri Baptist Children's Home v. State Tax Commission, 867 S.W.2d 510, 512 (Mo. banc 1993). It is the fair market value of the subject property on the valuation date. Hermel, Inc. v. State Tax Commission, 564 S.W.2d 888, 897 (Mo. banc 1978).
Complainant's Burden of Proof
In order to prevail, Complainant must present an opinion of market value and substantial and persuasive evidence that the proposed value is indicative of the market value of the subject property on January 1, 1999. Hermel, Inc. v. State Tax Commission, 564 S.W.2d 888, at 897. Substantial evidence can be defined as such relevant evidence as a reasonable mind might accept as adequate to support a conclusion. See, Cupples-Hesse Corporation v. State Tax Commission, 329 S.W.2d 696, 702 (Mo. 1959). Persuasive evidence is that evidence which has sufficient weight and probative value to convince the trier of fact. The persuasiveness of evidence does not depend on the quantity or amount thereof but on its effect in inducing belief. Brooks v. General Motors Assembly Division, 527 S.W.2d 50, 53 (Mo. App. 1975).
Weight to be Given Evidence
The Hearing Officer is not bound by any single formula, rule or method in determining true value in money, but is free to consider all pertinent facts and estimates and give them such weight as reasonably they may be deemed entitled. The relative weight to be accorded any relevant factor in a particular case is for the Hearing Officer to decide. St. Louis County v. Security Bonhomme, Inc., 558 S.W.2d 655, 659 (Mo. banc 1977); St. Louis County v. STC, 515 S.W.2d 446, 450 (Mo. 1974); Chicago, Burlington & Quincy Railroad Company v. STC, 436 S.W.2d 650 (Mo. 1968).
Trier of Fact
The Hearing Officer as the trier of fact may consider the testimony of an expert witness and give it as much weight and credit as he may deem it entitled to when viewed in connection with all other circumstances. The Hearing Officer is not bound by the opinions of experts who testify on the issue of reasonable value, but may believe all or none of the expert's testimony and accept it in part or reject it in part. St. Louis County v. Boatmen's Trust Co., 857 S.W.2d 453, 457 (Mo. App. E.D. 1993); Vincent by Vincent v. Johnson, 833 S.W.2d 859, 865 (Mo. 1992); Beardsley v. Beardsley, 819 S.W.2d 400, 403 (Mo. App. 1991); Curnow v. Sloan, 625 S.W.2d 605, 607 (Mo. banc 1981).
Opinion Testimony by Experts
If specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert on that subject, by knowledge, skill, experience, training, or education, may testify thereto.
The facts or data upon which an expert bases an opinion of inference may be those perceived by or made known to the expert at or before the hearing and must be of a type reasonably relied upon by experts in the field in forming opinion or inferences upon the subject and must be otherwise reliable, the facts or data need not be admissible in evidence. Section 490.065, RSMo; Courtroom Handbook on Missouri Evidence, Wm. A. Schroeder, Sections 702-505, pp. 325-350.
DECISION
Ruling on Respondent's Objection
Counsel for Respondent objects to Exhibit F on the basis of the holding in Nash v. Stanley Magic Door, Inc., 863 S.W.2d 677 (Mo. App. E.D. 1993) relative to rebuttal evidence being offered which should have been submitted in Complainant's case in chief.
Exhibit F is a letter from Starwood Hotels & Resorts Worldwide, Inc. The letter is to FelCor Lodging Limited Partnership. The subject of the letter is the Purchase and Sale Agreement dated April 21, 1998, which involved the sale of the subject property. The letter explains the contract provision on purchase price allocation. Exhibit F was used by Counsel for Complainant to cross-examine Respondent's expert relative to his reliance on the allocated purchase price of the subject property.
Counsel for Respondent's objection to Exhibit F is overruled. His assertion that Exhibit F should have been offered as part of Complainant's case in chief is not well taken. Counsel's reliance on Nash is misplaced.
Complainant's appraiser placed no reliance on the 1998 allocated purchase price of the subject property, therefore there was no reason for Complainant's case in chief to have included Exhibit F. Exhibit F was used as rebuttal as to the propriety of Respondent's expert relying upon the allocated purchase price. The Exhibit challenged the credibility of the methodology of Respondent's expert on this critical point.
Nash supports the following fundamental propositions relative to admitting rebuttal evidence. Admissibility of rebuttal evidence is within the discretion of the Hearing Officer. The Hearing Officer in his discretion may decline to allow a party to admit evidence in rebuttal that supports the party's case in chief. Exhibit F was not offered as support for Complainant's case in chief. Neither does the exhibit support the valuation determined by Complainant's appraiser. However, it does challenge the use of the allocated purchase price by Respondent's appraiser. Mr. Hilgeman's final opinion of value relied upon the sales comparison approach as most indicative of true value in money. His sales comparison approach relied upon the allocated purchase price of the subject and the sales of two other properties. Therefore, Exhibit F was an appropriate document to present and question the appraiser about, relative to his development of the sales comparison method for arriving at value.
Complainant Proves Value
Complainant's expert witness provided the necessary evidence to establish the value of the subject property. Although the cost and sales comparison methods used by Mr. McReynolds were not the primary basis for his final opinion of value, they provided overall support to his valuation under the income approach. Since the subject property is an investment property, the development of an appropriate income approach is most reflective of the subject's market value.
The income approach presented by Mr. McReynolds was the strongest indicator of value. It was premised upon the actual recent operating history of the subject property. The data relied upon would be the same data that a prospective investment purchaser would examine and rely upon in arriving at a value for the property. The forecasted income and expenses used by Mr. McReynolds are well supported by the subject's operating history. The overall rate utilized by the appraiser was developed from appropriate market data. In order to support the market developed rate, the appraiser performed a check using the Mortgage/Equity technique and the Debt Coverage Factor analysis. Mr. McReynolds made an appropriate deduction to account for the personal property of the hotel. A deduction to account for the contributory value for the operation of the hotel resulting from easements and additional parking area, without which the hotel would not be able to operate at the level reflected by the historic income was also appropriately made by the appraiser.
Deduction for Personal Property
Mr. McReynolds made the adjustment to account for the personal property in a very simple manner. He calculated the value for the personal property and simply deducted it from his capitalized income stream, to arrive at a value for the real property. Respondent's appraiser utilized the same methodology, except he used the appraised value as shown from the Respondent's records. This methodology for deducting personal property from a hotel property is the same as that employed in Equitable Life v. Morton, STC Appeal No. 84-10203, p. 15, February 3, 1989. There are other methodologies available that have been recognized in Commission decisions.
In Diamond Savings Association v. Pearson, STC Appeal No. 92-40124, March 18, 1994, the methodology used was to apply a rate of return (capitalization rate plus effective tax rate on personal property) to the assessed value of personal property and deduct the resulting figure from the net operating income before capitalizing the income stream. This accounts for the return on the personal property. The return of personal property is accounted for in the reserves for replacement as Mr. McReynolds did in this instance. If this methodology is applied using the McReynolds' figures, the indicated value for the subject real property would be $14,373,000. However, if this methodology were employed using the assessed value of the personal property as shown by Respondent's appraiser but otherwise applying this to the McReynolds income approach, the indicated value would be $13,857,000.
In the cases of Crown Center v. Boley, STC Appeal No. 92-32757, May 26, 1994 and Crown Center v. Boley, STC Appeal No. 92-32760, July 22, 1994, the methodology that was used was the methodology set forth in Hotels and Motels, A Guide to Market Analysis, Investment Analysis and Valuations, Stephen Rushmore, MAI, Appraisal Institute, 1997, pp. 244-246. The return of personal property is accounted for under either a straight line or percentage of revenue method. Mr. McReynolds used a percentage of revenue to calculate a reserve for replacement deduction. The return on personal property is calculated by taking the value of the existing personal property times the rate of return and the effective tax rate for personal property. When calculations are made relying on Mr. McReynolds calculated personal property value the indicated values for the subject real property after adjustment for personal property are $13,275,500 and $12,761,300, for the straight line and percentage of revenue methods. When the same calculations are made but Respondent's value for personal property is utilized, the indicated values would be $11,727,000 and $11,212,800.
As a check on Mr. McReynolds' methodology in adjusting for the personal property, the Hearing Officer calculated the possible indicated values utilizing both the McReynolds calculated value for personal property and Respondent's appraised value for personal property, using the Equitable, Diamond and both Rushmore (Crown Center) methods. This resulted in a total of eight different indicated values for the real estate after adjusting for the personal property. The values ranged from $11,212,800 to $14,373,000. The mean was $12,704,400 and the median was $12,849,950. Accordingly, the McReynolds appraisal value of $12,938,600 which accounted for the personal property adjustment was certainly well within the indicated range and just slightly above both the mean and the median.
While other methods for addressing this part of the appraisal problem may be of a more sophisticated, text book nature, the analysis of the various means of that could be utilized provide sound support for the method employed by Mr. McReynolds. In a case such as this where both appraisers elected to use the exact same method to make the personal property adjustment, the Hearing Officer has no need to substitute his judgment for a different method which might have been used.
Abatement Issue
In Crown Center, supra, the Commission recognized two possible alternatives for addressing an abatement issue in appraisal of real property. The value of the abatement can be calculated by taking the value of the real estate times the assessment percentage time one-half of the effective tax rate which produces the amount abated and this is then taken times the present worth of $1 per period for the number of years abated at 10%. The alternative method is to simply reduce the effective tax rate to reflect the level of taxes actually charged against the property. Mr. McReynolds elected to utilized the alternative method. He simply calculated the effective tax rate using a 16% assessment ratio instead of 32%. This is certainly acceptable under Crown Center. Furthermore, Respondent did not challenge or rebut this methodology for handling the abatement.
As a check, the Hearing Officer calculated the value for the subject real property using the calculation of present worth method for the abatement. This was applied for the eight different methods which could be employed when addressing the personal property deduction. Those calculations resulted in indicated values ranging from $10,988,800 to $14,221,300. The mean was $12,494,038 and the median was $12,599,200. Here again the McReynolds' value was solidly within the range and slightly above the mean and median. Accordingly, the value proposed using the reduction in effective tax rate method is well supported when judged against the alternative method.
When no challenge is present to the methodology employed and it is a recognized method, properly employed, for dealing with the specific appraisal question, the Hearing Officer has no basis to insist upon an alternative appraisal method or to reject the value proposed.
Easement and Leased Property
Mr. McReynolds also made an adjustment of $500,000 to account for a benefit to the owner in the operation of the subject hotel for the use of additional land under easement and lease. The appraiser concluded the value of the benefit cannot be attributable to the subject property, but is attributable to the easement and leased property adjoining the subject. This adjustment was not challenged or rebutted in any manner by Respondent's appraiser. The Hearing Officer finds no basis upon which to disallow this adjustment.
Respondent's Evidence Unpersuasive to Establish Value
The evidence presented by Respondent was unpersuasive to establish the value proposed by the appraiser, or to find the true value in money to be the amount determined by the Board of Equalization or the Assessor. Mr. Hilgeman relied primarily upon his sales comparison approach. He also performed both a cost and income approach to support his opinion of value.
Respondent's sales comparison was based upon three sales of hotels, one of which was the 1998 sale of the subject. Ordinarily, the sale of a property under appeal at a time relevant to the tax date sets the upper limit of value. The actual sale of a property can be considered in arriving at value. St. Joe Minerals Corp. v. STC, 854 S.W.2d 526 (App. E.D. 1993).
The two other hotel properties used by Mr. Hilgeman in his appraisal were not sufficiently comparable to be used in this appeal. Furthermore, they were not actually relied upon in the sales analysis, since there were no adjustments for differences between these properties and the subject. Furthermore, the final opinion of value determined by the appraiser was simply the allocated purchase price of the subject, less the personal property. Thus, Mr. Hilgeman's sales comparison value was only based on the allocated purchase price of the subject.
In the present appeal critical factors exist which render the 1998 sale inappropriate for determining value. The 1998 sale was part of a sale involving a total of eight hotels from various partnerships owned by Starwood Hotels and Resorts. The total purchase price of the eight hotels was $245,000,000. Of this, $31,700,000 was allocated to the subject property, adjacent easements, leasehold interest, and the personal property in the hotel. The $31,700,000 figure is an allocation for income tax purposes and does not reflect the true value of the real estate. Included in the allocated price are significant intangible assets including the value of the going concern and the desire on the part of the buyers to significantly increase their Embassy Suites franchise. The property had been acquired by Starwood in 1992 when they purchased the assets and going concern for $12,500,000. The rate of increase from the 1992 purchase price to the 1998 allocation value would be 19% per year, compounded. This rate of increase cannot be expected nor can it be explained, except that the $31,700,000 amount is a significant overstatement of the value of the real property. Exhibit A, pp. 9-10.
Reliance upon the allocated value by Respondent's appraiser was misplaced. An allocated value for income tax or any other purpose is not a sale. An allocated value which includes personal property, ongoing business concern and various other intangibles does not represent what a willing buyer and seller would have agreed to as a price for the property being valued, i.e., the land as improved. Reliance upon an allocated value as in the present appeal is more akin to determining a value in use rather than true value in money as is required by Missouri statutes and case law.
Mr. Hilgeman should have viewed with suspicion the allocated value for use in his sales comparison approach. He should have, as did Complainant's appraiser, determined that it did not represent a sale price for the real property. Furthermore, Mr. Hilgeman's denial that had he been aware of Exhibit F this still would not have altered his opinion relative to his sales comparison approach (Tr. 60, Line 13 - Tr. 64, Line 9) casts serious doubt upon the credibility of the witness relative to his judgment in developing his sales comparison analysis.
The income approach performed by Mr. Hilgeman contained significant errors which rendered it non-persuasive to establish value. The appraiser overstated the income stream for the subject. The net operating income was significantly in excess of what the historic performance for the subject had been. No adjustment was made to account for the value of the easement and leased property. This factor had to be addressed to get an appropriate and proper valuation of the property under appeal and not attribute value to the subject from other real property. The development of the capitalization rate was not persuasive, especially in light of the analysis on this point performed by Complainant's appraiser.
Respondent's cost approach suffered from a base calculation which did not account for this being an atrium hotel which overstated the cost to construct new. There was also a failure to make appropriate allowance for external obsolescence for the subject property.
Allocation of Sales Price
The present appeal presents the situation where there was an actual sale of the subject property at a time relevant to tax day. However, the sale was a combined sale of eight hotels and there was an allocation of value to the subject from this sale. The allocation reflects the value of the personalty, the going concern, the Embassy Suites franchise and the value of the collective acquisition. Exhibit B, Q & A, 16 & 17, Exhibit F.
The reliance placed on the allocation as an indicator of fair market value of the subject real estate by Respondent's appraiser is erroneous and not justified. Mr. Hilgeman's testimony established that he relied upon the allocation of value without knowing the purpose of the allocation or the basis for its determination. Tr. 16, Line 13 - Tr. 21, Line 1. Mr. Hilgeman's reliance was based upon Section 4.4 of the Purchase and Sale Agreement which dealt with the purpose for the allocation of value. The purpose for the allocation related to the filing of tax returns and that both Seller and Purchaser would file their respective income tax returns in accordance with the allocation. Exhibit 1, Purchase and Sale Agreement, Section 4.4, p. 17. The intention of the allocation was never to set a value on the real property for purposed of ad valorem tax purposes. Exhibit F.
Purchase price allocations, whether in instances of a single ongoing business or when dealing with multiple ongoing businesses, such as in the present case, generally do not represent an open market transaction of a buyer and seller for the real estate only. Square D Company v. Schauwecker, STC Appeal No. 99-44509 (July 27, 2000). The allocation of a purchase price for eight different hotels for bookkeeping and income tax purposes may be based on various motivations and factors which are not reflective of what the market value of the subject property may be under Missouri law. BCB Manufacturing USA, Inc. v. Morton, STC Appeal 95-10492 (April 10, 1997).
The actual sales price of a property at a time relevant to tax date is generally a very strong indicator of value. It is normally given significant weight. However, the present instance is not such a case. There was no sale of the subject property by itself. Further, the sale of the eight properties included various items of value other than the real estate. The allocation of a value to the subject property which included value for personal property, going concern, franchise and collective acquisition of a group of hotels does not establish true value in money for the real property which is the focus of this appeal.
ORDER
The assessed valuation for the subject property as determined by the Board of Equalization for St. Louis City for the subject tax day is SET ASIDE.
The assessed value for the subject property for tax year 1999 and 2000 is set at $1,992,000.
A party may file with the Commission an application for review of this decision within thirty (30) days of the mailing of such decision. The application shall contain specific grounds upon which it is claimed the decision is erroneous. Failure to state specific facts or law upon which the appeal is based will result in summary denial. Section 138.432, RSMo 1994.
If an application for review of this decision is made to the Commission, any protested taxes presently in an escrow account in accordance with this appeal shall be held pending the final decision of the Commission. If no application for review is received by the Commission within thirty (30) days, this decision and order is deemed final and the Collector of St. Louis City, as well as the collectors of all affected political subdivisions therein, shall disburse the protested taxes presently in an escrow account in accord with the decision on the underlying assessment in this appeal. If any or all protested taxes have been disbursed pursuant to Section 139.031(8), RSMo, either party may apply to the circuit court having jurisdiction of the cause for disposition of the protested taxes held by the taxing authority.
Any Finding of Fact which is a Conclusion of Law or Decision shall be so deemed. Any Decision which is a Finding of Fact or Conclusion of Law shall be so deemed.
SO ORDERED January 29, 2001.
STATE TAX COMMISSION OF MISSOURI
W. B. Tichenor
Chief Hearing Officer