BARCLAY CLUB APARTMENTS, ) ) Complainant, ) ) v. ) Appeals Number 03-79005 thru 03-79010 ) ) LISA POPE, ASSESSOR, ) PLATTE COUNTY, MISSOURI, ) ) Respondent. )
DECISION AND ORDER
HOLDING
The true value in money of the subject property on January 1, 2003, and January 1, 2004 was $24,373,610 (assessed value $4,639,990) as determined by the Board of Equalization.
ISSUE
The issue in this case is the true value in money of a 400 unit apartment complex on Barry Road, Platte County, Missouri.
SUMMARY
On January 7, 2005, an evidentiary hearing was held before State Tax Commission hearing officer, Luann Johnson, at the Platte County Administration Building in Platte City, Missouri. Complainant appeared by counsel, Wayne Tenenbaum. Respondent appeared by counsel, John Shank. Briefs were filed by both parties.
The subject property was valued by the Board of Equalization at $24,373,610 (assessed value $4,639,990). At hearing, Respondent asserted a market value of $26,000,000 (assessed value $4,940,000). At hearing, Complainant asserted a value of $16,800,000 (assessed value $3,192,000).
OBJECTION TAKEN UNDER ADVISEMENT
At hearing, counsel for Complainant sought to introduce Complainant’s Exhibit C to rebut Respondent’s assertion of the occupancy level as of mid-2004. Counsel for Respondent objected to the introduction of a rebuttal exhibit at hearing inasmuch as the time for filing rebuttal exhibits had passed. Although the time for filing rebuttal exhibits had passed, the determination of whether or not to accept a rebuttal exhibit is within the discretion of the Hearing Officer and, after review of the exhibit, Respondent’s counsel stipulated that the testimony which said rebuttal exhibit was intended to rebut was, in fact, erroneous. Consequently, the Hearing Officer finds that the admission of Complainant’s Exhibit C will not prejudice Respondent and is necessary for a clearer understanding of the vacancy issues surrounding the subject property.
EXHIBITS
The following exhibits were introduced into evidence:
Complainant’s Exhibits
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Exhibit A |
Appraisal Report of Thomas Slack |
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Exhibit B |
Written Direct Testimony of Thomas Slack |
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Exhibit C |
Rent Rolls from May 31, 2004 |
Respondent’s Exhibits
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Exhibit 1 |
Appraisal Report of Brian Everly |
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Exhibit 2 |
Written Direct Testimony of Brian Everly |
FINDINGS OF FACT
1. Jurisdiction over this appeal is proper. Complainant timely appealed to the State Tax Commission from the decision of the Platte County Board of Equalization.
2. The property which is the subject of State Tax Commission appeals number 03-79005 through 03-79010 consists of approximately 31.062 acres improved with 18 apartment buildings and a club house. Construction was completed in 2001. All buildings are wood frame design with wood floor joists. Exterior walls are pressboard or vinyl siding on frame construction with some brick accents. The improvements contain 400 apartment units including 120 one-bedroom/one-bath units, 194 smaller two-bedroom/two-bath units, 50 larger two-bedroom/two-bath units, and 36 three-bedroom/two-bath units. The unit sizes are 749 square feet, 976 square feet, 1,156 square feet and 1,776 square feet, respectively. Complainant’s Exhibit A, p. 17; Respondent’s Exhibit 1, pp. 13-14. Site improvements include 187 detached garages, 556 open parking spaces and 15 handicapped parking spaces. In addition to the clubhouse, the property also features an exercise room, a pool, ponds, playground area and security gate. Landscaping has been professionally done. Respondent’s Exhibit 1, pp. 15, 16.
3. The subject improvements are classified as good quality, Class D, Multi-Residential under Marshall and Swift. The improvements are in good condition. Windows are thermo-pane double hung in framing. The front doors are steel, the interior doors are paneled vinyl, and the patio/balcony doors are metal sliding glass thermo-pane. Units have fireplaces, balcony or patio, and ceiling fans. Ceilings are painted drywall. The top floor units have vaulted ceilings, the 1st floor units have nine foot ceilings and the 2nd floor units have eight foot ceilings. Interior walls are painted drywall over wooden frame. Each bathroom features a sink, a toilet and a tub/shower. Some units have soaker tubs. The kitchens are of good quality. Amenities include a range/oven, full sized refrigerator, double sink with disposal, automatic dishwasher and some units have microwaves and washer/dryer hookups. Respondent’s Exhibit 1, pp. 14, 15.
4. The subject is located at 3800 NW Barry Road, Kansas City, Platte County, Missouri. The area is in the growth stage of development. Many new retail strip malls are being constructed as well as single box retail. Barry Road and I-29 has the most growth of retail, office, medical, eateries, banks, single family and multi-family in the neighborhood. The neighborhood is located north of the Missouri river approximately 10 to 15 miles north of downtown Kansas City via I-29 and I-35. This area extends from north of the Missouri River to Highway 92, west to the Missouri River in Platte County, and east to the I-35/I-435 corridor in Clay County. Respondent’s Exhibit 1, p. 11.
5. Prior to the tax day, the subject property experienced a fire which damaged eight units. Those units were insured but had not been repaired as of the tax day. Tr. 30.
6. The land for the project was purchased in 1998 for $2,184,000. Complainant’s Exhibit A, Addendum B, p. 2.
7. As of the end of 2002, Complainant’s total investment in the property, before appreciation, depreciation and entrepreneurial profit, was $24,341,000. This sum included loan fees, capitalized interest, land value and $927,000 in furniture, fixtures and equipment. Tr. 21.
8. The subject property’s current use as an apartment complex is its highest and best use. Complainant’s Exhibit A, p. 21; Respondent’s Exhibit 1, p. 22.
9. The subject property suffers from abnormally high vacancy rates. The subject property is located in one of the fastest growing areas of the Kansas City, Missouri metropolitan market, with population increasing 24.9% between 1980 and 1990 and 27.5% between 1990 and 2000. Complainant’s Exhibit A, p. 7.
Market occupancy rates for apartments in this area was 94% as of December 31, 2001 and dropped to 91% by mid 2002. Complainant’s Exhibit A, p. 15. In spite of the fact that the subject property had an amenity package comparable to other newer complexes and an exterior which was only slightly below the norm, the subject property’s occupancy rate was only 75.5% on the tax day. Complainant’s Exhibit A, p. 17. By mid-2004, occupancy for the subject property had risen to between 82.5% and 84%, depending on the treatment of the eight units which had been damaged by fire. Complainant’s Exhibit C. It does not appear that the subject property had reached a stabilized occupancy as of the tax day.
Although speculating that the occupancy problem might be attributable to the development having too many big units, Complainant’s appraiser found that it was impossible to extract a functional obsolescence adjustment for the unit mix. Complainant’s Exhibit A, p. 17, 24. Complainant also asserted that performance might have been impacted by the quality of the siding or location of the property; or, perhaps, an overbuilt market. Unfortunately, Complainant’s appraiser did not perform paired data analysis for other apartments with similar siding and locations, leaving us with no market derived explanation for why this property is performing so poorly. Likewise, the assertion of an overbuilt market is not supported by market evidence. "External obsolescence usually carries a marketwide effect and influences a whole class of properties, rather than just a single property." The Appraisal of Real Estate, 12th Edition, 2001, p. 412. Thus, even if the property suffers from an overbuilt market, it should nevertheless be performing at the same level as similar complexes in the area, i.e. 91% occupancy.
Respondent asserts that the excessive vacancy might be due to management problems as evidenced by the fact that Complainant has changed management companies three times between the time the property opened and the hearing day; or an overbuilt market. Tr. 44, 66. Like Complainant, Respondent has failed to provide market data which would assist us in pinpointing the cause of the vacancy problem.
Because of a deficiency in the evidence, we are unable to determine the correct vacancy rate for the subject property.
10. The income approach, cost approach, and sales comparison approach are all appropriate valuation methodologies to use for the subject property. Complainant’s Exhibit A, p. 20; Respondent’s Ex. 1, p. 23. All three approaches can be adjusted to measure market reaction to excessively high vacancy rates. However, no adjustments can be considered reliable without market support.
11. Neither party presented substantial and persuasive evidence in support of their opinion of value.
12. The value approved by the Board of Equalization represents the market value for the subject property on January 1, 2003, and January 1, 2004.
CONCLUSIONS OF LAW
Jurisdiction
Jurisdiction over this appeal is proper. Complainant timely filed its appeal from the decision of the Platte County Board of Equalization.
Highest and Best Use
True value in money is the fair market value of the property on the valuation date, and is a function of its highest and best use, which is the use of the property which will produce the greatest return in the reasonably near future. Aspenhof Corp. v. State Tax Commission, 789 S.W.2d 867, 869 (Mo. App. 1990).
It is true that property can only be valued according to a use to which the property is readily available. But this does not mean that in order for a specific use to be the highest and best use for calculating the property’s true value in money, that particular use must be available to anyone deciding to purchase the property. . . .A determination of the true value in money cannot reject the property’s highest and best use and value the property at a lesser economic use of the property. Snider v. Casino Aztar/Aztar Missouri Gaming Corp., 156 S.W.3d, 341, 348-349 (Mo. 2005).
True Value in Money
Section 137.115, RSMo 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 purchased by one who is desiring 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).
Taxpayer has Burden of Proof
In Westwood Partnership v. Gogarty, 103 S.W.3d 152 (Mo. App. E.D. 2003), the court of appeals stated:
There is no longer an automatic presumption regarding the correctness of an assessor's valuation. Section 138.431.3. This statutory change from the previous situation in which the assessor's valuation was presumed to be correct does not mean that there is now a presumption in favor of taxpayer. The taxpayer in a Commission tax appeal still bears the burden of proof and must show by a preponderance of the evidence that the property was improperly classified or valued. Industrial Development Authority of Kansas City v. State Tax Commission of Missouri, 804 S.W.2d 387, 392 (Mo. App. 1991).
In Reeves v. Snider, 115 S.W.3d 375 (Mo. App. S.D. 2003), the court of appeals described the taxpayer's burden as follows:
Taxpayers were the moving parties seeking affirmative relief, and as such, they bore the burden of proving the vital elements of their case, i.e., the assessments were "unlawful, unfair, improper, arbitrary or capricious." Cupples Hesse Corp. v. State Tax Comm'n, 329 S.W.2d 696, 702 (Mo.1959); Westwood P'ship v. Gogarty, 103 S.W.3d 152, 161[8] (Mo.App.2003);84 C.J.S. Taxation §§ 710, 726. This is true regardless of the existence or non-existence of the challenged presumption. As the Supreme Court of Missouri explained, "even were we to hold that it [the presumption] has been overcome, the burden of proof on the facts and inferences would still remain on petitioner, for it is the moving party seeking affirmative relief." Cupples, 329 S.W.2d at 702[16]. See also 84 C.J.S. Taxation § 710, which states: "Even where there is no presumption in favor of the assessor's ruling, if no evidence is offered in support of the complaint, the reviewing board is justified in fixing the valuation complained of in the amount assessed by the assessor."
To prevail, Taxpayers had to "present an opinion of market value and then ... present substantial and persuasive evidence that the proposed value is indicative of the market value of the subject property on tax day." Daly v. P.D. George Co., 77 S.W.3d 645, 651 (Mo. App. 2002).
Substantial and Persuasive Evidence
Substantial evidence is that evidence which, if true, has probative force upon the issues, i.e., evidence favoring facts which are such that reasonable men may differ as to whether it established them, and from which the Commission can reasonably decide an appeal on the factual issues. 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).
Cost Approach
The cost approach may be based on either reproduction cost or replacement cost. The reproduction cost, or cost of construction, is a determination of the cost of constructing an exact duplicate of an improved property using the same materials and construction standards. The replacement cost is an estimate of the cost of constructing a building with the same utility as the building being appraised but with modern materials and according to current standards, design and layout.
The cost approach is most appropriate when the property being valued has been recently improved with structures that conform to the highest and best use of the property or when the property has unique or specialized improvements for which there are no comparables in the market.
While reproduction cost is the best indicator of value for newer properties where the actual costs of construction are available, replacement cost may be more appropriate for older properties. Snider v. Casino Aztar/Aztar Missouri Gaming Corp., 156 S.W. 3d, 341, 347 (Mo. 2005). (citations omitted).
Income Approach
The income approach determines value by estimating the present worth of what an owner will likely receive in the future as income from the property. The income approach is based on an evaluation of what a willing buyer would pay to realize the income stream that could be obtained from the property when devoted to its highest and best use.
When applying the income approach to valuing business property for tax purposes, it is not proper to consider income derived from the business and personal property; only income derived from the land and improvements should be considered. This approach is most appropriate in valuing investment-type properties and is reliable when rental income, operating expenses and capitalization rates can reasonably be estimated from existing market conditions. The initial step in applying the income approach is to find comparable rentals and make adjustments for any differences. Snider v. Casino Aztar/Aztar Missouri Gaming Corp., 156 S.W. 3d, 341, 347 (Mo. 2005). (citations omitted).
Comparable Sales Approach
The comparable sales approach uses prices paid for similar properties in arms-length transactions and adjusts those prices to account for differences between the properties. Comparable sales consist of evidence of sales reasonably related in time and distance and involve land comparable in character. This approach is most appropriate when there is an active market for the type of property at issue such that sufficient data is available to make a comparative analysis. Thus application of this approach to special use property is not appropriate. Snider v. Casino Aztar/Aztar Missouri Gaming Corp., 156 S.W. 3d, 341, 347-348 (Mo. 2005). (citations omitted).
Fixtures/Constructive Annexation
Characterization of an item as a fixture, something otherwise personal but attached to realty under such circumstances as to become a part of it, depends upon the finding of three elements: annexation to the realty, adaptation to the use to which the realty is devoted, and intent of the annexor that the object become a permanent accession to the freehold. Missouri cases are uniform in requiring that each of these elements be present in some degree, however slight, before an item may be considered a fixture.
The doctrine of constructive annexation recognizes that a particular article, not physically attached to the land, may be so adapted to the use to which the land is put that it may be considered an integral part of the land and constructively annexed thereto. Since its development, the doctrine has ordinarily been applied to only three types of objects: (i) machinery placed in an industrial establishment for permanent use and necessary to the operation of the plant (sometimes referred to as "the integrated industrial plant rule"), (ii) items that are essential to the use of what is clearly a fixture and cannot readily be used independently elsewhere; and (iii) items normally physically attached to the realty that are severed for a temporary purpose such as cleaning or repair. The integrated industrial plan rule is usually only applied to industrial plants using a substantial amount of machinery and tools, some of which are essential to the plant’s operation even though not bolted to the floor or otherwise physically attached. Sears Roebuck & Co. v. Seven Palms Motor Inn, 530 S.W. 2d 695 (Mo. banc 1975).
Depreciation
The three principal methods for estimating depreciation are (1) the market extraction method; (2) the age-life method; and (3) the breakdown method. Market extraction and age-life calculations are the primary methods used by most appraisers to estimate the total depreciation in a property. The breakdown method is a more comprehensive method that identifies specific elements of depreciation and treats each element separately. It enumerates the components of total depreciation, i.e., physical deterioration, functional obsolescence, and external obsolescence.
The market extraction and age-life methods tend to deal with the whole property and are easier to understand and apply. The elements of depreciation are implicit, not explicit. Both are limited in that they assume lump-sum depreciation from all causes can be expressed in an overall estimate, do not always distinguish between short-lived and long-lived items, and rely on general forecasts of effective age and remaining economic life. The age-life method is further limited in that it typically reflects a straight-line pattern of depreciation.
Regardless of the method applied, the appraiser must ensure that the final estimate of depreciation reflects the loss in value from all causes and that no form of depreciation has been considered more than once. Double charges for depreciation may produce inappropriately low value indications in the cost approach. . .
The concepts of economic life, effective age, and remaining economic life expectancy consider all elements of depreciation in one overall calculation. Therefore, the effective age estimate considers not only physical wear and tear but also any loss in value for functional and external considerations. This type of analysis is characteristic of the market extraction and age-life depreciation methods. However, the age-life method can be modified to reflect the presence of any known items of curable physical depreciation or incurable deterioration in short-lived building components.
When estimating physical deterioration in the breakdown method, the most important age-life concepts are (1) useful life; (2) actual age; and (3) remaining useful life. The use of these terms in the breakdown method relates to the separation of physical depreciation from functional and external obsolescence. Economic life considers all three components of depreciation in one age-life estimate, whereas useful life considers only the depreciation of the physical components of a property. A building’s useful life would probably be longer than the economic life of the same building. In spite of that difference, the application of useful life in the breakdown method and economic life in the market extraction and age-life methods should yield the same approximate estimate of total depreciation. The Appraisal of Real Estate, 12th Edition, Appraisal Institute, 2001, pgs. 383-385.
Actual Age
Actual age, which is sometimes called historical age or chronological age, is the number of years that have elapsed since building construction was completed. Actual age serves two purposes in depreciation analysis. First, it is the initial element analyzed in the estimation of effective age. Second, in the application of the breakdown method, it is fundamental to the age-life analysis needed to estimate physical deterioration in the long-lived and short lived components of an improvement. The Appraisal of Real Estate, 12th Edition, Appraisal Institute, 2001, pg. 385.
Effective Age
Effective age is the age indicated by the condition and utility of a structure and is based on an appraiser’s judgment and interpretation of market perceptions. The Appraisal of Real Estate, 12th Edition, Appraisal Institute, 2001, pg. 385.
Physical Depreciation
Physical deterioration is the wear and tear from regular use and the impact of the elements. The Appraisal of Real Estate, 12th Edition, Appraisal Institute, 2001, pg. 363.
Economic Obsolescence/External Obsolescence
Economic obsolescence, also called external obsolescence, is a term of art within the appraisal industry and "is the impairment of desirability or useful life arising from economic forces, such as changes in highest and best use and legislative enactments that restrict or impair property rights and changes in supply and demand relationships. It is sometimes referred to as locational obsolescence." Economic obsolescence is generally not curable. Property Assessment Valuation, International Association of Assessing Officers, 1977, p. 160.
External obsolescence is a temporary or permanent impairment of the utility or salability of an improvement or property due to negative influences outside the property. The Appraisal of Real Estate, 12th Edition, Appraisal Institute, 2001, pg. 363.
Functional Obsolescence
Functional obsolescence is a term of art within the appraisal industry and is the impairment of functional capacity or efficiency and is a loss in value brought about by such factors as overcapacity, inadequacy, and changes in the art that affects the property item itself or its relation with other items composing a larger property. It is the inability of a structure to perform adequately the function for which it is currently employed. Functional obsolescence may be either curable or incurable. Property Assessment Valuation, International Association of Assessing Officers, 1977, p. 159, 170.
Functional obsolescence is a flaw in the structure, materials, or design that diminishes the function, utility and value of the improvement. The Appraisal of Real Estate, 12th Edition, Appraisal Institute, 2001, pg. 363.
Entrepreneurial Profit
When the direct and indirect costs of developing a property are used to provide an indication of value, the appraiser must also include an economic reward sufficient to induce an entrepreneur to incur the risk associated with a building project. . . . .The estimation of entrepreneurial profit is problematic, but the estimate is a necessary component of total cost . . .The breakdown of costs for custom-built properties may not be comparable to the breakdown for speculatively built properties, which further complicates the task of estimating a rate of entrepreneurial profit. Theoretically, however, the value of custom-built properties should also reflect an entrepreneurial profit. The Appraisal of Real Estate, 12th Edition, Appraisal Institute, 2001, pgs. 360-362.
Experts
An expert’s opinion must be founded upon substantial information, not mere conjecture or speculation, and there must be a rational basis for the opinion. Missouri Pipeline Co. v. Wilmes, 898 S.W.2d 682, 687 (Mo. App. E.D. 1995). The state tax commission cannot ignore a lack of support in the evidence for adjustments made by the expert witnesses in the application of a particular valuation approach. Drey v. State Tax Commission, 345 S.W.2d 228, 234-236 (Mo. 1961), Snider v. Casino Aztar/Aztar Missouri Gaming Corp., 156 S.W.3d, 341, 348 (Mo. 2005).
The testimony of an expert is to be considered like any other testimony, is to be tried by the same test, and receives just so much weight and credit as the trier of fact may deem it entitled to when viewed in connection with all other circumstances. The hearing officer, as the trier of fact, has the authority to weigh the evidence and 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 may accept it in part or reject it in part. Beardsley v. Beardsley, 819 S.W.2d 400, 403 (Mo. App. 1991); Curnow v. Sloan, 625 S.W.2d 605, 607 (Mo. 1981); Scanlon v. Kansas City, 28 S.W.2d 84, 95 (Mo. 1930).
DISCUSSION
Complainant has failed to present substantial and persuasive evidence tending to indicate that the Board of Equalization overvalued its property or that the value placed on the property is unlawful, unfair, improper, arbitrary or capricious.
Complainant Failed to Present Substantial
and Persuasive Evidence of Value
I. Complainant’s Cost Approach
Complainant’s appraiser has failed to use market data to make adjustments to his land sales. Complainant’s land sales indicate that property values were increasing between 1998 and 2001. In spite of this market data, Complainant’s appraiser states that, "the apartment market is not as strong as in the late 1990s or even 2001" and, based upon this statement alone, adjusted his land sales downward. Complainant’s Exhibit A, pp. 23-24. The subject land sold for $2,184,000 in September, 1998. The assertion that the property was worth no more than $1,960,000 some four-plus years later, requires market support. Adjustments which are not supported by market data are entitled to no weight.
Complainant’s cost calculations fail because they project a cost to replace the improvements which produced a lesser quality improvement, fail to include soft costs including an entrepreneurial profit, and uses a devalued land price.
Mr. Slack concluded that the subject property was a lesser quality because (1) there was some pressboard siding [all pictures in Complainant’s appraisal show vinyl siding]; (2) a competitor said that his apartment complex was better quality; and (3) when Mr. Slack calculated the replacement cost new using the lesser quality, it came out to a number similar to the reported original costs. None of these arguments establish that the subject property was of a lesser quality.
Complainant’s appraiser applies an effective age of three years to the property. The property was not completed until sometime in 2001making the actual age something less than two years. Complainant’s Exhibit A, pp. 21, 26.
Effective age and economic life are market driven and reflect how the market views the property. Using "effective age" accounts for depreciation from all sources.
"All aspects of a property and its market, including the quality and condition of the construction, the functional utility of the improvements, and the market and locational externalities, must be considered in the estimation of a property’s economic life. The condition and functional utility of an improvement as well as market and locational factors must also be taken into account in estimating an improvement’s effective age. . . .The effective age and economic life expectancy of a structure are the primary concepts used by an appraiser in measuring depreciation using age-life relationships. In the age-life method, total depreciation is estimated by calculating the ratio of the effective age of the property to its economic life expectancy and applying this ratio to the property’s total cost." The Appraisal of Real Estate, 12th Edition, Appraisal Institute, 2001, pgs. 386, 392. (emphasis ours).
In spite of the fact that effective age calculations are intended to capture depreciation from all sources, Complainant’s appraiser made an additional $4,840,000 adjustment as external obsolescence which he attributed to an "overbuilt market." Complainant’s Exhibit A, p. 26. The calculation was based upon the difference between the income the property was actually generating and the income it should be generating. He concluded that the below market performance of the subject property must be based upon an external factor when, in fact, it could have as easily been based upon poor management, as evidenced by the fact that the owner had changed management companies three times between the date of completion and the trial date. Tr. 24, 44. No market evidence was presented which suggested that other apartment complexes were struggling with an "overbuilt market" to the degree that the subject property was struggling.
In the alternative, Complainant’s appraiser argues that the subject property fails to generate market rents and occupancy because it is of poorer quality. Again, there is simply no market evidence to support this argument.
Making additional deductions for external obsolescence is not supported by the market and substantially overstates the amount of depreciation to be applied to the property.
Because of these numerous and substantial flaws, Complainant’s cost approach can be accorded no weight.
II. Complainant’s Income Approach
The subject property is located in one of the fastest growing areas of the Kansas City, Missouri metropolitan market, with population increasing 24.9% between 1980 and 1990 and 27.5% between 1990 and 2000. Complainant’s Ex. A, pg. 7. Apartment occupancy in this area was 94% as of December 31, 2001, and dropped to 91% by mid 2002. Complainant’s Exhibit A, p. 15. In spite of the fact that the subject property had an amenity package comparable to other newer complexes and an exterior which was only slightly below the norm, the subject property’s occupancy rate was only 75.5%. Complainant’s Exhibit A, p. 17. Although speculating that the occupancy problem might be attributable to the development having too many big units, Complainant’s appraiser found that it was impossible to extract a functional obsolescence adjustment for the unit mix. Complainant’s Exhibit A, pp. 17, 24, leaving us with no market derived explanation for why this property is performing so poorly.
Complainant’s appraiser placed "primary reliance on historical operations of the subject" to determine potential gross income and, when "forecasting operating expenses, primary weight [was] given to historical operations of the subject." Complainant’s Exhibit A, pp. 33, 34. The obvious flaw in this methodology is that it gives little weight to market data, urging us to accept without explanation that 24.5% is an appropriate vacancy rate when the market clearly indicates that 9% is the appropriate market rate. It also asks us to accept concessions of 10.4% when the other properties in the market are giving concessions of only 8.3%. Complainant’s Exhibit A, p. 30.
Recent sales show overall capitalization rates to be from 6.6% to 8.4%. Complainant’s Exhibit A, p. 20. These overall rates include a tax load. To determine his capitalization rate, Complainant’s appraiser adopted an 8.5% cap rate which he adjusted upward to 9.75% to account for the tax load. Complainant’s Exhibit A, p. 35. Including the tax rate in the capitalization rate twice artificially inflates the capitalization rate and understates the value of the property.
It is impossible to reach a determination of market value without actually resorting to the use of market data and there simply is not enough market data contained in Complainant’s income approach to make this approach valid. Because of these numerous and substantial flaws, Complainant’s income approach can be accorded no weight.
III. Complainant’s Sales Comparison Approach
Complainant’s appraiser performed a sales comparison approach which indicated a range of market value for the subject property of $53,400 to $66,700 per unit after physical adjustments then adjusted each of the sales downward by 20% to 30% to account for the fact that the subject property was not generating the same revenue. Complainant’s appraiser designated this as an "occupancy" adjustment. Adjustments to the sales comparison approach must be based on market reaction to areas of significant variation. Market reaction cannot be measured without the use of market derived data.
IV. Personal Property
Complainant’s appraiser attempted to deduct the value of what he alleges to be personal property in all three of his approaches to value. The fallacy with this deduction is that he admits that apartment complexes are rarely sold without their appliances. Complainant’s Exhibit A, p. 25. Further, Complainant never filed a personal property declaration with the county indicating that it wanted the county to treat approximately $1 million in appliances as personal property. Tr. 75. Inasmuch as taxpayers have a legal obligation to file personal property declarations and risk incurring substantial penalties for failure to file those declarations, it is reasonable to conclude that Complainant’s failure to file such a declaration was based upon its determination that appliances should be treated as fixtures and taxed as real property rather than as personal property.
V. Intangible Leases
Complainant’s appraiser asserts that the value of the leases in place constitute an intangible value that should be deducted from the subject property’s market value. This issue was previously raised by Complainant’s appraiser in STL 400 North Fourth LLC v. St. Louis City, STC Appeals No. 02-20028 through 02-20029 and 03-20000 through 03-20001. Mr. Slack’s argument was rejected in that proceeding and is rejected here for the same reasons.
Respondent Failed to Present Substantial
and Persuasive Evidence of Value
Respondent’s evidence suffered from many of the same flaws as Complainant’s evidence; most notably a lack of market support. In addition, it was simply impossible for this Hearing Officer to follow the thought processes of Respondent’s appraiser.
Conclusion
It is unfortunate and problematic that the subject property is not performing up to market standards. However, we cannot reduce market value without some market derived evidence which would indicate that a reduction is warranted. Reductions cannot be made for speculative reasons. Reductions might have been considered if Complainant’s appraiser had presented paired sales/paired rent analysis to support some of his speculations, but that type of market data was not made available to the Commission. The state tax commission cannot ignore a lack of support in the evidence for adjustments made by the expert witnesses in the application of a particular valuation approach. Drey v. State Tax Commission, 345 S.W.2d 228, 234-236 (Mo. 1961), Snider v. Casino Aztar/Aztar Missouri Gaming Corp., 156 S.W.3d, 341, 348 (Mo. 2005).
A party does not meet his burden if the evidence on any of the essential elements would leave the fact finder "in the nebulous twilight of speculation, conjecture or surmise." Rossman v. G.F.C. Corp. of Missouri, 596 S.W.2d 469 (Mo. App. E.D. 1980).
ORDER
The assessed value approved by the Board of Equalization is AFFIRMED .
A party may file with the Commission an application for review of a hearing officer decision within thirty (30) days of the mailing of such decision. The application shall contain specific detailed 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.
If an application for review of a hearing officer 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 Platte County 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 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 August 4, 2005.
STATE TAX COMMISSION OF MISSOURI
Luann Johnson
Hearing Officer
BARCLAY CLUB APARTMENTS, )
)
Complainant, )
)
v. ) Appeals Number 03-79005 thru 03-79010
)
LISA POPE, ASSESSOR, )
)
Respondent. )
ORDER AFFIRMING HEARING OFFICER DECISION
UPON APPLICATION FOR REVIEW
HOLDING
Upon review of the entire record, the Commission affirms the Hearing Officer Decision. The Findings of Fact, Conclusions of Law, Decision and Order of the Hearing Officer are incorporated by reference herein as fully as if set out verbatim hereat.
HISTORY
On August 4, 2005, Hearing Officer Luann Johnson entered her Decision and Order (Decision) affirming the assessments by the Platte County Board of Equalization.
Complainant timely filed its Application for Review of the Decision. Respondent timely filed her Response.
ALLEGATIONS OF ERROR
Complainant asserted the Decision to be (1) contrary to the weight of the evidence on the whole record; (2) unsupported by competent and substantial evidence upon the whole record; (3) contrary to the law applicable to such appeals; and (4) the result of an abuse of discretion on the part of the Hearing Officer.
Complainant’s argument appears to be:
(1) It is not the Commission’s place to examine the quality of the evidence. Specifically, Complainant states: “To allow this Hearing Officer to make appraisal judgments, as she does continuously throughout this Decision and Order, is an affront to professional appraisers and the appraisal profession.” Although Complainant goes on to admit that it is the Hearing Officer’s obligation to weigh the evidence, Complainant fails to state how the Hearing Officer can weigh that evidence without examining its quality.
(2) It is not the Commission’s place to pick and choose which evidence supports its determination of market value. Complainant repeatedly refers to the fact that the Hearing Officer made certain unfavorable findings of fact by excluding Complainant’s evidence on particular points. Complainant states: “It appears, then, that the Hearing Officer has selectively chosen data from the record which will support her conclusion, while, at the same time, conveniently ignoring data from the record which will not support her conclusion.” In order to make findings of fact, a trier of fact must choose some data while ruling out other data. The Commission finds the Hearing Officer did not ignore Complainant’s evidence. She set out in detail in the decision why she found Complainant’s evidence to not be persuasive.
(3) Only appraisers, not the Commission, can determine market value. Complainant states: “The Hearing Officer should not be allowed to substitute his or her appraisal judgment for that of the expert witnesses who appear in appeals before the Commission. The Hearing Officer should weight the evidence, not create the evidence. Had this Hearing Officer acted in that fashion, Complainant is convinced the outcome of its appeal would be substantially different.”
The role of the trier of fact is set forth above. It is well within the authority of the Commission to establish value. However, to say that the Hearing Officer created evidence in this case completely misstates the Hearing Officer’s conclusions. She affirmed the decision of the Board, finding that Complainant had failed to present substantial and persuasive evidence that the Board’s decision was unlawful, unfair, arbitrary or capricious. In doing so, she pointed out the fallacies in the appraiser’s logic and methodology. The Commission does not find this to be “creating evidence.”
In this argument,
Complainant wholly misunderstands the role of experts in a Tax Commission
proceeding. “The rules governing opinion
and expert testimony are well settled.
The testimony of an expert is to be considered like any other testimony,
is to be tried by the same test, and receives just so much weight and credit as
the jury or judge may deem it entitled to when viewed in connection with all
other circumstances. There is no logical
distinction between expert opinion testimony and fact testimony and the values
of both are to be measured by precisely the same standards. A judge, as the trier of fact, has the
authority to weigh the evidence and 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.” Beardsley
v. Beardsley, 819 S.W.2d 400, 403 (
(4) The Commission cannot reject an income approach which is based solely on contract rent as proof of value; or The Commission must find contract rent to be “economic reality.” Complainant states: The Hearing Officer chides Complainant’s appraiser for not utilizing “market” data, thus enabling her to ignore the economic realities of the subject property. The Commission is aware of no case that states “contract rent is economic reality.” Rather, the cases hold that there may be some instances where specific factors such as prudent below market long term leases or federal restrictions of rent may limit the earning potential of a property and make market data inconsistent with economic reality.
As determined in Missouri Baptist Children’s Home v. State Tax Commission, 867 S.W.2d 510 (Mo. 1993), the Commission may look at contract rent in conjunction with economic rent if a long term lease was prudent when entered into. The Supreme Court goes on to say that “projected actual income may be adjusted to reflect current market conditions where actual rent substantially distorts the property’s true value.” l.c. 513. Further, that court goes on to hold that there will be times when value for income producing property cannot be determined under an income approach at all.
Likewise, in Maryville Properties L.P. v. Nelson, 83 S.W.3d 608, 614 (W.D. 2002) the court of appeals held, “When relying on the income capitalization method to determine value, the fact finder necessarily has some discretion to decide what weight will be given to actual rent, as opposed to potential market rent, in reaching its decision.”
No where in either case do the courts state that contract rent equals economic reality. Indeed, Missouri Baptist Children’s Home specifically says that relying on actual rent may distort a property’s true value.
It is the obligation of the Commission, not an appraiser, to determine what constitutes market value. If the Commission is provided adequate information to make that decision, a party should be surprised if its case fails.
(5) If the county’s evidence is worse than the taxpayer’s evidence, then the taxpayer must prevail. Complainant states: “If the Complainant’s evidence was insufficient to meet the required burden of proof, then the Hearing Officer should have ruled on the appeal at the conclusion of Complainant’s case. Not having done so, the burden shifted to Respondent to prove its case . . .Respondent’s evidence was woefully insufficient and of no probative value. This leaves the Complainant’s evidence as the only evidence of value before the Hearing Officer.”
Complainant cites no law for the proposition that Hearing Officer is required to making a finding of the adequacy of Complainant’s evidence at the close of that evidence. The law requires the Hearing Officer to make written findings of fact, a feat which cannot be accomplished on the record in the middle of a complex proceeding. The fact no such finding was made during the course of the proceeding in no way validates Complainant’s proposed value or shifts the burden of proof. If a Complainant fails to present reliable evidence showing that the Board’s value was unlawful, unfair, arbitrary or capricious, the burden never shifts to the Respondent. If neither party makes its case, the Commission is not required to choose one party’s evidence over the others.
(6) Respondent’s appraisal should be excluded because it was not demonstrated to conform to USPAP standards. Complainant argues that, inasmuch as it could not be established that Respondent’s appraisal met USPAP standards it must, as a matter of law, be excluded from evidence. No cases were cited in support of this proposition. The Hearing Officer correctly stated that the Tax Commission is not the agency which establishes USPAP standards or enforces those standards.
(7) If the Commission rejects the Respondent’s value, it must also reject the Board of Equalization’s value because the Board’s value was the work product of Respondent’s witness. The Hearing Officer affirmed the Board’s value of $24,373,610. At hearing, Respondent asserted a different market value of $26,000,000. The Hearing Officer rejected Respondent’s value of $26,000,000 because “Respondent’s evidence suffered from many of the same flaws as Complainant’s evidence; most notably a lack of market support. In addition, it was simply impossible for this Hearing Officer to follow the thought processes of Respondent’s appraiser.”
As reflected in the transcript of the hearing, Respondent’s appraiser was unable to articulate the basis for his value of $26,000,000. However, the fact that the Respondent’s appraiser was not able to articulate himself under pressure does not establish the Board’s value of $24,373,610 was unlawful, unfair, arbitrary or capricious.
The basis for the Board’s decision is not set out in the record and an explanation is not required for the Commission to find in favor of the Board. The Commission notes that the cost approach, based upon replacement cost new less depreciation, is a valid method of determining value for a property. Further, the Hearing Officer found that as of the end of 2002, immediately before the January 1, 2003, tax day, Complainant’s total investment in the property, before adjustments for appreciation, depreciation, and entrepreneurial profit, was $24,341,000, a number substantially similar to the value placed upon the property by the Board of Equalization. It is reasonable to conclude that the Board’s value was based upon the cost approach.
(8) The Hearing Officer should not have chided Complainant’s appraiser for failing to consider that otherwise undisclosed fixtures should be valued as part of the real property. Complainant’s appraiser admitted that apartment complexes are rarely sold without their appliances, yet he made no attempt to determine if Complainant was treating appliances as fixtures or personal property. Complainant asserts “The concern of an independent real estate appraiser is not with how or whether the owner of real estate files a personal property declaration. Rather, his concern is with the value of the real estate.” The Commission recognizes that the omission may have been created by the taxpayer rather than the taxpayer’s appraiser but arguing that an appraiser is somehow exempt from valuing otherwise taxable fixtures because he is “independent” is not well taken. By definition, fixtures are real estate; consequently, it is not possible to accurately value the subject real estate without valuing the fixtures.
RESTATEMENT OF APPLICABLE LAW
Complainant’s Application for Review suggests a misunderstanding of numerous laws. The applicable laws are summarized here:
As To Burden of Proof
Under
In Westwood Partnership v. Gogarty, 103 S.W.3d 152 (Mo. App. E.D. 2003), the court of appeals stated:
There is no longer an automatic
presumption regarding the correctness of an assessor's valuation. Section
138.431.3. This statutory change from the previous situation in which the
assessor's valuation was presumed to be correct does not mean that there is now
a presumption in favor of taxpayer. The taxpayer in a Commission tax appeal
still bears the burden of proof and must show by a preponderance of the
evidence that the property was improperly classified or valued. Industrial
Development Authority of
In Reeves v. Snider, 115 S.W.3d 375 (Mo. App. S.D. 2003), the court of appeals described the taxpayer's burden as follows:
Taxpayers were the moving parties seeking affirmative relief, and as such, they bore the burden of proving the vital elements of their case, i.e., the assessments were "unlawful, unfair, improper, arbitrary or capricious.” Cupples Hesse Corp. v. State Tax Comm'n, 329 S.W.2d 696, 702 (Mo.1959); Westwood P'ship v. Gogarty, 103 S.W.3d 152, 161[8] (Mo. App. 2003); 84 C.J.S. Taxation §§710, 726. This is true regardless of the existence or non-existence of the challenged presumption. As the Supreme Court of Missouri explained, "even were we to hold that it [the presumption] has been overcome, the burden of proof on the facts and inferences would still remain on petitioner, for it is the moving party seeking affirmative relief.” Cupples, 329 S.W.2d at 702[16].
To
prevail, Taxpayers had to "present an opinion of market value and then ...
present substantial and persuasive evidence that the proposed value is indicative
of the market value of the subject property on tax day." Daly v. P.D.
George Co., 77 S.W.3d 645, 651 (Mo. App. 2002), Nance v. State Tax Commission of
Notwithstanding the question of the existence or non-existence of a presumption in favor of the Assessor, a presumption still remains in favor of the Board of Equalization. Because of the available presumptions, the Commission is not required to first determine the evidentiary basis for the Board’s valuation, even if that basis was of dubious validity. Hercules, Inc. v. State Tax Commission, 787 S.W.2d 739 (E.D. 1989).
Thus, all law agrees that the taxpayer will not prevail if it fails to prove that the Board’s decision was unlawful, unfair, arbitrary or capricious.
As to Methodology
The State Tax
Commission is the administrative agency, appointed by the Governor and approved
by the General Assembly, to deal with the specialized field of property tax
valuation. State ex rel Cassilly v. Riney, 576 S.W.2d 325 (
The
proper methods of valuation and assessment of property are delegated to the
Commission. C&D Investment Co. v. Bestor, 624 S.W.2d 835 (
The
Commission shall correct any assessment which is shown to be unlawful, unfair,
arbitrary or capricious.
Clearly, it is the Commission who determines the proper methods for valuing property. The Commission operates as an impartial trier of fact, it is not required to ignore misapplication of recognized appraisal methodologies. Complainant argues that the Hearing Officer should not be allowed to substitute his or her appraisal judgment for that of the expert witnesses who appear in appeals before the Commission. Complainant further states that it is an affront to professional appraisers and the appraisal profession to allow a Hearing Officer to act in this capacity. The Hearing Officer in question has over 15 years experience handling complex appraisal disputes and is qualified, by the nature of her experience and training, to rule on the validity of property tax methodologies employed by the parties. As an agent of the Commission, it is her duty to be an expert in valuation methodology.
As to Experts
An expert’s
opinion must be founded upon substantial information, not mere conjecture or
speculation, and there must be a rational basis for the opinion. Missouri Pipeline Co. v. Wilmes, 898
S.W.2d 682, 687 (Mo. App. E.D. 1995).
The state tax commission cannot ignore a lack of support in the
evidence for adjustments made by the expert witnesses in the application of a
particular valuation approach. Drey
v. State Tax Commission, 345 S.W.2d 228, 234-236 (
The
testimony of an expert is to be considered like any other testimony, is to be tried
by the same test, and receives just so much weight and credit as the trier of
fact may deem it entitled to when viewed in connection with all other
circumstances. The hearing officer, as
the trier of fact, has the authority to weigh the evidence and 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 may accept it in part or
reject it in part. Beardsley v.
Beardsley, 819 S.W.2d 400, 403 (
Opinion
evidence cannot invade the province of the finder of fact. Eickmann
v. St. Louis Public Service Co., 253 S.W.2d 122 (
As to the Value of Market Data and Economic
Reality
The standard of
valuation is
Complainant cites Missouri Baptist Children’s Home v. State
Tax Commission, 867 S.W.2d 510 (
Contrary to
Complainant’s inference, neither case stands for the proposition that the
Commission must value property based upon contract rent. Indeed to value all property based upon
contract rent would violate the uniformity clause of Article X of the Missouri Constitution
because contract rent can be influenced by any number of factors that may
represent value in use but do not impact market value, such as property being
in a lease up stage or the impact of poor management. Business acumen, or lack thereof, is not part
of market value. Equitable Life Assur.
Soc. Of U.S./Marriott Hotels, Inc. v. State Tax Commission, 852 S.W.2d 376
(
Rather, the above cited cases stand for the proposition that contract rent may be considered by the Commission -- when shown to be relevant -- in addition to evidence of market rents. The burden is upon the party seeking to deviate from market derived values, to establish that such a deviation is warranted.
In this instance, economic reality is that apartments in the subject property’s locale are uniformly doing better than the subject property. Another reality is that Complainant’s property is not subject to a long term lease limiting income nor is it subject to federal restrictions limiting income. Yet another reality is that the subject property cost approximately $24 million to build less than two years before the Board valued the property at $24 million. The Commission finds Complainant failed to explain what “economic reality” prevents this property from performing like substantially similar properties. Complainant’s point is not well taken.
Substantial and Persuasive Evidence
Substantial
evidence is that evidence which, if true, has probative force upon the issues,
i.e., evidence favoring facts which are such that reasonable men may differ as
to whether it established them, and from which the Commission can reasonably
decide an appeal on the factual issues. Cupples-Hesse
Corporation v. State Tax Commission, 329 S.W.2d 696, 702 (
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 (
The
Hearing Officer provided an extensive discussion of the flaws in Complainant’s
appraisal report. Such a flawed report does
not rise to the level of substantial evidence, much less persuasive
evidence. The Hearing Officer judged the
credibility of the report and found it to be lacking. This quality of evidence is not adequate to
support a conclusion that the Board’s decision was unlawful, unfair, arbitrary
or capricious.
ORDER
The assessed value approved by the Board of Equalization, is AFFIRMED.
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.
Judicial review of this Order may be had in the manner provided in Sections 138.432 and 536.100 to 536.140, RSMo within thirty days of the date of the mailing of this Order.
SO ORDERED December 9, 2005.
STATE TAX COMMISSION OF
_____________________________________
Bruce E. Davis, Chairman
_____________________________________
Sam D. Leake, Commissioner
_____________________________________
Jennifer Tidwell, Commissioner