State Tax Commission of Missouri

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, 2005. Hermel, Inc. v. State Tax Commission, 564 S.W.2d 888, at 897. Respondent, when advocating a value different from that determined by the original valuation or a valuation made by the Board of Equalization, must meet the same burden of proof to present substantial and persuasive evidence of the value advocated as required of the Complainant under the principles established by case law.

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). See also, Westwood Partnership v. Gogarty, 103 S.W.3d 152 (Mo. App. E.D. 2003); Daly v. P. D. George Co., 77 S.W.3d 645 (Mo. App. E.D. 2002); Reeves v. Snider, 115 S.W.3d 375 (Mo. App. S.D. 2003).

Post-Hearing Brief Exhibits

Complainant’s Brief Exhibits 1 & 2

Complainant’s Brief was accompanied by Brief Exhibit 1 and Brief Exhibit 2. Brief Exhibit 1 was a recalculation of Potential Gross Income based upon testimony by Respondent’s Appraiser under cross-examination. Counsel for Complainant applied the testimony of Mr. Lauer to the appraiser’s calculations to arrive at the recalculation. Exhibit 1 is an appropriate exhibit to accompany the Brief as it is a demonstration of the attorney’s argument of facts in evidence.

In like manner Complainant’s Brief Exhibit 2 was a recalculation of a table appearing on page 110 of the Lauer appraisal which addressed the matter of the anticipated expenses during absorption of the subject’s vacant space. The recalculation demonstrated in Exhibit 2 was based upon the cross-examination testimony of the appraiser. Exhibit 2 was likewise appropriate as a demonstration of the argument developed from facts in evidence.

Respondent’s Brief Exhibits 1 through 5

Respondent tendered Brief Exhibits 1 through 5 with his Brief. These five Exhibits were as follows:

Exhibit 1 – two pages consisting of (1) copy of 2005 BOMA Experience Exchange Report – City Analysis 2004 – Saint Louis, Mo – Suburban 500,000 to 99,999 Sq. Ft – U. S. Private Sector – Class A-only (1 page) and (2) copy of 2005 BOMA Experience Exchange Report – City Analysis 2004 – Saint Louis, Mo – Suburban Less than 50,000 Sq. Ft – U. S. Private Sector – Class A-only (1 page).

Exhibit 2 – Market Scope– St. Louis Office Market – Year-End 2004 – Trammell Crow Company (1 page).

Exhibit 3 – Office Report – Year End 2004 – Gundaker Commercial Group (1 page).

Exhibit 4 – Colliers Turley Martin Tucker Market Report – St. Louis, Mo – Fourth Quarter 2005 (1 page).

Exhibit 5 – Market Scope– St. Louis Office Market – Year-End 2005 – Trammell Crow Company (1 page).

The Buckles report (Exhibit A) does contain in the Appendix a copy of page 297 of the 2005 BOMA Experience Exchange Report. This page contains information on St. Louis, Missouri Suburban less than 50,000 and 50,000 – 99,999 square feet of more than just Class A buildings. However, Respondent’s Brief Exhibit 1 applies to only Class A buildings. The document in Exhibit A and Brief Exhibit 1 are simply not the same documents.

The documents submitted as Respondent’s Brief Exhibits are not part of the evidentiary record in this case. None of these documents were offered into evidence during the hearing on this appeal. Counsel for Complainant’s point is well taken. Reply Brief pp. 1 & 5. Respondent’s Brief Exhibits were not relied upon by Mr. Lauer in preparing his appraisal. Nor does the record establish that any of the documents were relied upon by Mr. Buckles as he prepared his appraisal.

Post-Hearing Briefs serve the purpose of permitting Counsel for the parties to present arguments based upon the evidence in the record. Post-Hearing briefing is not a means whereby either party can introduce into evidence documents or testimony which is not part of the record. Counsel for Complainant properly developed his arguments in his Briefs based upon the evidence in the record.

Respondent attempts to introduce into the record documents which were not established at hearing to have been relied upon by Respondent’s appraiser and were not introduced into evidence at the hearing. This is not permissible under the guise of filing a Brief. Since Brief Exhibits 1 through 5 are not part of the evidentiary record they cannot be considered in rendering a decision herein. Therefore, the arguments developed from reliance on Exhibit 1 through 5 are irrelevant since they are not based on facts in evidence.

Hearing Officer Finds Value

The present case provides a record in which two state certified appraisers, both Members of the Appraisal Institute, have developed appraisal reports utilizing the three recognized approaches to value. Complainant’s evidence standing on its own met the standard of substantial and persuasive to rebut the presumption of correct assessment at the fair market value of $8,005,730 as determined by the Assessor and sustained by the Board. However, when two MAI appraisals are presented, both must be considered and varying degrees of weight will be accorded to different aspects of each appraisal. Accordingly true value in money for the subject property for the 2005 – 2006 assessment is determined based upon conclusions, assumptions and opinions from both the Buckles and Lauer appraisals.

Income Approach to Value

The Hearing Officer having considered the data, approaches to value, assumptions, conclusions and opinion of value of each appraiser, as well as the arguments advanced in the Briefs, developed from facts in evidence, has determined the evidence supports a finding of value based upon the income approach to value. The property under appeal is a rental property. A prospective knowledgeable purchaser of this property will look at the income stream and the related expenses which impact upon that stream. To the extent that the cost and sales comparison approaches are correlated to and reconciled with the income approach, they provide support for a determination of the fair market value.

Potential Gross Income

Buckles Rent Comparables

Complainant’s appraiser conducted a rental analysis based on ten office leases in four different buildings, plus the asking rental prices on available space on four other properties. The current and asking per square foot rent rate for the fourteen leases ranged from $14.00 to $22.50, with a median of $20.25 and an average of $20.22. Exhibit A. post-page 36. Mr. Buckles concluded on an economic rent of $21.50 per square foot. Exhibit A, p. 37.

Lauer Rent Comparables

Respondent’s appraiser relied upon five different leases in four properties for his rental analysis. The per square foot rent rate for these five leases ranged from $20.00 to $23.50, with a $21.00 median and a $21.80 average. Exhibit 1, pp. 73-80. Mr. Lauer settled on $20.67 per square foot as economic rent. Exhibit 1, p. 80.

Subject’s Rent Rates

The rent rates for the subject as of January 1, 2005, fell in the following range: $17.06, $21.00, $22.50, $22.50, $25.00, $25.00, and $25.00, for the seven tenants. This results in a median rent rate of $22.50, with an average of $22.58. Exhibit A, post-page 35; Exhibit 1, pp. 71-72. Four of the subject’s tenants are related entities to Boardwalk Corporate Centre, LLC. These four tenants had space rented at a rate of $22.50 and $25.00 per square foot. Both Buckles and Lauer were in agreement that for purposes of the income approach an economic rent rate was appropriate to be applied for the rented area occupied by the related entities. Exhibit A, p. 37; Exhibit 1, p. 80. Tr. p. 71, Lines 4 – 13.

Hearing Officer Finds Potential Gross Income

The Potential Gross Income concluded by the Buckles appraisal, including additional income from parking fees and other miscellaneous income items, was $1,715,375. Exhibit A, pp. 37-38. The Potential Gross Income determined by the Lauer appraisal, after correction for not applying an economic rent rate to the lease for a related entity, including miscellaneous income, was $1,610,689. Tr. p. 71, Lines 4 – 13, Complainant’s Brief, p. 2, Complainant’s Brief Exhibit 1, Respondent’s Reply Brief, p. 6. However, the Hearing Officer is not persuaded that the treatment of the related party rents is appropriate.

As of the valuation date the subject’s rent roll showed the following with regard to the end of lease terms, rentable area and the actual rents being received. Exhibit A, pp. 18 & post-35.

Ending Term	Rentable Area	Rental Rate	Potential Income
12/07	1,825	$17.06	$ 31,619
11/05	2,135	$21.75	$ 45,795
8/11	826	$22.50	$ 19,065
6/7	839	$22.50	$ 18,878
8/10	11,427	$25.00	$ 290,475
3/12	3,831	$25.00	$ 98,170
3/12	24,304	$25.00	$ 618,251
Vacant	30,992	$-0-	$ 650,832
		TOTAL	$1,773,085

All leases, with the exception of the one ending in November 2005 provided for rent step-ups.

A prospective purchaser in January 2005 would be aware of the rent rates where were set by the existing leases. Economic rent of $21.00 per square foot (Buckles - $21.50; Lauer $20.67) for the vacant area, or $650,832, is appropriate. Therefore the potential gross rental income for the subject in January 2005 was $1,773,085. The amount of $84,250 as additional income (Exhibit A, p. 38) is to be added to the potential gross rental income to arrive at the Potential Gross Income for the subject of $1,857,335.

***

Vacancy and Collection Loss

The crux of this case rests on a determination of the vacancy and collection loss to be applied to the subject property. Because the two appraisers addressed this portion of the appraisal problem from vastly different perspectives, it is necessary to review the methodology of both Mr. Buckles and Mr. Lauer on this critical point.

Buckles Vacancy Rate

Class “A” Office Space Sub-Market Survey

The Buckles appraisal arrived at a stabilized vacancy rate for purposes of developing the income approach of 30%. This was developed from an analysis of the subject’s own history, as well as analysis of the market vacancy rate for the entire subject property’s sub-market Class “A” office space in St. Charles County as of January 2005. This analysis included a total of eight properties in addition to the subject. Exhibit A, pp. 29-30, 38; Exhibit F; Exhibit G, p. 5, Q & A 19.

The eight properties represented buildings constructed from 1997 to 2005. The total rentable area covered by these eight buildings was 420,274 square feet. The total square foot vacancy for these properties was 111,105 or 26.44%. When the subject was included in the analysis the total rentable area increases to 496,453 and the total vacancy is 142,097 or 28.62%. The range of individual vacancy rates of the eight buildings ranged as follows: 10.9%, 21.1%, 23.4%, 24.7%, 29.2%, 29.6%, 41.5% and 50.0%. Even though the property with 50% vacancy had just come on line for rental in January 2005, it was in direct competition for rental space with the subject. The vacant areas in square feet for the eight properties ranged as follows: 21,811, 6,500, 12,629, 19,550, 17,700, 8,200, 6,197 and 18,500.

Subject’s Vacancy History

The subject property (76,179 square feet rentable area) suffered from a vacancy in January 2005 of 30,992 or 40.7%. In January 2003 the subject was 45.93% vacant. By January 2004 it was at 40.73%, or the same vacancy rate it had in January 2005.

Testimony at hearing established that at the time of hearing, some of the subject’s space had been rented to three different tenants, so that only 13,373 square fee remained vacant or 17.56% vacancy. However, those leases had been obtained by reducing asking rents from $22 per square foot to $17 - $19.50. In addition six months rent free concessions were granted to two of the tenants, which covered a total of 15,771 square feet. Tr. 128, Line 3 – 16; Tr. 131, Line 17 – 22.

Buckles Stabilized Vacancy Rate

Based upon the Class “A” office space study and the subject’s actual vacancy history, Mr. Buckles concluded on a 30% vacancy rate for purposes of developing his income approach.

Lauer Vacancy Rate and Absorption Analysis

Market Surveys

Mr. Lauer referenced to four surveys of office space in arriving at his vacancy rate. The 2004 year end Society of Industrial and Office Realtors survey determined a suburban Class A office vacancy rate of 17.1%. A first quarter 2005 Coldwell Banker Commercial survey found overall office vacancy in St. Charles County at 17.5%. Trammell Crow Company reported office vacancy for St. Charles at 7.8% for the first quarter of 2005, while Colliers Turley Martin Tucker (CTMT) reported Class A office vacancy for St. Charles County at 9.5%. Mr. Lauer determined a range for office vacancy from 7.8% to 17.5%, with an average of 11.6% and settled on 12% to utilize in his income approach. Exhibit 1, pp. 81-82. None of these reports were included in the Lauer appraisal addendum. The CTMT 2004 and 2005 Reports (Exhibit I & J) were received into evidence during cross-examination of Mr. Lauer. Tr. 91, Lines 8 – 12; Tr. 92, Line 1 – Tr. 93, Line 10.

Subject’s History

Mr. Lauer recognized the actual vacancy history of the subject. He acknowledged that as of January, 2005 the actual vacancy of the subject was over 40%. In order to account for the vast different between what he had determined to be a stabilized market vacancy of only 12% and the subject’s actual vacancy of 40%, the appraiser develop an absorption analysis for the subject property to project as to when the property would actually achieve somewhat close to a 12% vacancy.

Absorption Analysis

Mr. Lauer projected that the subject could be expected to reach a stabilized vacancy rate of only 12% by 2007. This was based upon the 2004 CTMT year-end survey showing that 22.4% of all vacant office space in St. Charles County was absorbed during 2004. The appraiser then calculated a deduction for the absorption expenses to be deduced from the indicated value derived under the income approach utilizing a 12% vacancy. Exhibit 1, pp. 87-88.

However, under cross-examination, Mr. Lauer conceded that it would have been more accurate to consider only the absorption for Class A office space. That absorption rate equated to approximately 10%. Tr. 95, Lines 1 – 24. Therefore, the drastic change in the absorption rate that would have been more accurate resulted in a variety of changes to the calculations and the resulting total for the estimated absorption expenses. See, Complainant’s Brief, pp. 3-4 & Complainant’s Brief Exhibit 2.

Absorption Analysis Unpersuasive

After through consideration and review of the Lauer absorption analysis, the Lauer testimony under cross-examination, and the arguments advanced by Counsel for Complainant on this matter, the Hearing Officer concludes that neither the original absorption analysis, nor the revised projection developed by Counsel for Complainant (Complainant’s Brief Exhibit 2) are substantial and persuasive evidence. Counsel for Respondent’s arguments on this matter were reviewed, but could not be given any real consideration, given that they were based upon documents that were not part of the evidentiary record. The original analysis was demonstrated during cross-examination to be flawed to the point that it could not be given any probative weight. Reliance on absorption from all classes of office space, instead of Class A office space in St. Charles County rendered the analysis irrelevant.

The revised analysis developed in Complainant’s Brief Exhibit 2 appears very similar to the same type of methodology utilized in a discounted cash flow analysis, which the Commission has time and again declined to follow in cases involving properties such as the subject. While the projections to get the subject to a 12% vacancy may be based upon sound math covering the period from 2005 through 2012, that time period and the possible variance in rental rates and expenses is based too much on speculation and conjecture to be valid for the present appraisal problem.

Finally, the Hearing Officer rejects the absorption analysis because it is an unnecessary analysis to attempt to address an unsupported vacancy rate. The evidence was not rebutted that the subject as of the valuation date experienced a vacancy rate of 40.7%. Furthermore, the evidence of the vacancy rates of eight other St. Charles County Class A office buildings in January 2005 in excess of 26%, was likewise not rebutted. See, Class “A” Office Space Sub-Market Survey, supra. The idea that a knowledgeable and prudent investor-purchaser in January, 2005 would rely upon a 12% vacancy when the cold hard facts were as just stated, simply flies in the face of sound business practice. Furthermore, such a knowledgeable purchaser would be aware that the subject with its nearly 31,000 vacant square feet would be competing with eight other properties located in the subject’s immediate area having over 111,000 square feet of space available for rent. Furthermore, since according to Respondent’s appraiser the subject market area tends to compete with Western St. Louis County for similar office tenants (Exhibit 1, p. 72), there would have been an additional 2,017,240 square feet of Class A office space inventory in that market competing with the subject in January 2005. Exhibit I, p. 5 – Office Inventory and Vacancy Year End 2004.

Hearing Officer Finds Vacancy Rate

The evidence of the subject’s actual history, along with the vacancy analysis provided by Complainant’s appraiser is substantial and persuasive evidence to establish a vacancy rate of 30% for purposes of the present valuation. A conclusion that the subject’s January 2005 vacancy rate was not part of the market for Class A office space in either St. Charles County or the St. Louis metro area simply ignores what was a simple fact. The subject was partially leased at rates well within the range of actual and asking rates in St. Charles County and even in West St. Louis County. In point of fact the subject had reduced is asking rate from $25.50 in 2002 to $21.75 in January 2005. Exhibits A and 1. Clearly, the subject’s vacancy was not due to the rent rates being excessive for the market. The subject’s vacancy, while at the upper level of the market range was still part of the market range and must be given consideration on the issue of an appropriate vacancy for the development of the income approach.

From a mathematical standpoint, simply looking a four or five comparable properties or even at two or three surveys and relying upon the “average” presents an easy way to set a vacancy rate. However, if such a methodology is to be applied when determining vacancy, then logic dictates the same procedure be followed to find the average for potential gross income, other income, and expenses. To really simplify the entire process, one could simply calculate the average per square foot net operating income for a sample of rental office properties and apply that to the subject. If such a process were to be then followed consistently with regard to all other properties, one would be over-valuing about half of the properties and under-valuing the other half. Only a few properties which actually came close to the average net operating income would be valued at close to market value under the income approach.

When valuing any individual property under the income approach, the actual operating history – income and expense data – of the subject is part of the market. The subject’s rental rates may be in the upper, middle or lower part of the range, as may be its vacancy and expenses. However, the various levels at which the subject is operating, be they high, low or average, constitute part of the market.

Just as the actual sale of a property in an arms-length transaction has been found to be important evidence to be considered when finding fair market value (See, St. Joe Minerals Corp. v. STC, 854 S.W.2d 526 (App. E.D. 1993)), the actual income, vacancy and expenses of a given property must be given considerable weight when setting its true value in money. Especially, when the evidence, as in this case, establishes rental rates of the subject to be clearly in the range of the market for Class A office space and a significant number of other Class A properties in the subject’s area to be operating at vacancies comparable to the subject it is appropriate to give due weight to the subject’s vacancy and the range and average of those properties which most closely compete with the subject.

***

Hearing Officer Finds Effective Gross Income

Applying the vacancy rate (30%) to the Potential Gross Income ($1,857,335) results in a deduction to account for vacancy of $557,200. The Effective Gross Income computes to $1,300,135 ($1,857,335 - $557,200 = $1,300,135).

***

Operating Expenses

Buckles Expenses

Mr. Buckles arrived at his operating expenses based upon the subject’s actual expenses and the 2004 BOMA Experience Exchange Report provide in the Appendix to Exhibit A. Per square foot of rentable area expenses are shown to be $6.18 or 37.34% of the Effective Gross Revenue calculated in the Buckles income approach summary. The appraiser provided a detailed narrative relating to the determination for each expense item. Exhibit A, pp. 40-42, 48.

Lauer Expenses

The Lauer appraisal concluded on a $5.38 per square foot of rentable area expenses or 28.17% of the Effective Gross Income shown in the income approach summary. Mr. Lauer also analyzed the subject’s actual expenses and “other market data” to arrive at his expense calculations. A detailed narrative relating to the expense items was also provided by Mr. Lauer. Exhibit 1, pp. 82-85.

Hearing Officer Finds Operating Expenses

The Hearing Officer has performed a review and analysis of the actual expenses for the subject property giving consideration to its vacancy level as of January 2005, in addition the conclusions of each appraiser have been also considered. The expense data for 2003 and 2004 for the subject property was provided in both appraisals. Exhibit A, p. post-39; Exhibit 1, Addenda - Exhibit C.

The following chart provides a summary and comparison for the expense items itemized by each appraiser, as well as the actual expenses for 2004.

Expense Item	2004	Buckles	Lauer
Management	$ 58,825 (5%)	$ 61,302 (5%)	$ 50,961 (3.5%)
Insurance	$ 25,726	$ 26,000	$ 25,000
Utilities	$114,048*	$115,000*	$105,000
Repairs & Maintenance	$ 79,138	$ 87,500	$115,000
Janitorial	$ 83,301*	$ 83,500*	$ 90,000
Parking Lot & Grounds	$ 33,495	$ 33,500	$ -0-
Administrative	$ 670	$ 700	$ -0-
Sub Division Fees	$ 3,739	$ 3,750	$ -0-⁺
Security/Monitoring	$ 3,978	$ 4,000	$ -0-⁺
Legal & Professional	$ 29,296	$ 9,500	$ -0-
Advertising	$ 3,060	$ 3,000	$ -0-
Miscellaneous	$ 894	$ 30,000	$ 9,000
Reserves for Replacements	$ -0-	$ -0-	$ 15,249

* - based upon an occupancy of only 45,187 out of 76,179 rentable square feet.

⁺ - included in Miscellaneous

The following are the concluded expenses for the valuation of the subject property as of January 2005.

Expense Item	Expense Amount
Management	$ 65,010 (5% - EGI)
Insurance	$ 26,000
Utilities	$134,400*
Repairs & Maintenance	$ 87,500
Janitorial	$ 98,120*
Parking Lot & Grounds	$ 33,500
Administrative	$ 700
Sub Division Fees	$ 3,740
Security/Monitoring	$ 3,980
Legal & Professional	$ 9,500
Advertising	$ 3,000
Miscellaneous	$ 1,500
Reserves for Replacements	$ 15,250
TOTAL	$482,200

* - based upon an occupancy of 53,325 (30% - vacancy) out of 76,179 rentable square feet.

Summary Explanation of Expense Items

Management Fee – The appraisers differed as to the percentage of effective gross income that should be allowed for the Management Fee. Buckles opined the typical range to be 3% - 5%. Lauer placed the range at 3% - 4%. The actual fee was 5% of the actual operating income. The BOMA report cited in the Buckles appraisal gave an average management fee of .84 per square foot of rentable area. The amount decided on is at only 85.3 cents per square foot of rentable area or only 1.5% above the BOMA average.

Insurance – Buckles appeared to have simply rounded the 2004 insurance expense up to the next whole $1,000, while Lauer appeared to round down to the next whole $1,000. Based on the increase from 2003 ($20,169) to 2004 ($25,726), a reduction of $726 is simply not warranted, nor was any evidence presented to indicate a lowering of the insurance premium on the subject. While an increase might have been justified, Complainant’s appraiser felt the $26,000 amount was adequate. The Hearing Officer defers to that judgment on this item.

Utilities – Lauer failed to include the cost for trash removal in Utilities as an expense but opted to include it as part of the Janitorial expense item. He relied only upon electric, water and sewer and essentially arrived at an amount between the 2003 and 2004 costs. The actual utility (including trash) costs were for the subject having 45,187 square feet of office space occupied. Since the costs will increase as the occupancy increases it is appropriate to project these expenses based on a vacancy of 30%. Therefore, a calculation of the per square foot occupied cost for 2004 applied to occupied space of 53,325 under a 30 % vacancy produces the amount utilized. It is highly unlikely that this expense item would remain the same as for 2004, assuming that new tenants are going to occupy an additional 8,138 square feet o of space under the assumption on which the income approach is based.

Repairs and Maintenance – The Hearing Officer concurs with Mr. Buckles’ opinion on this item, as it is consistent with both the dollar and percentage decreases historically shown for the property from 2003 to 2004.

Janitorial – Like the item for Utilities this expense has to be adjusted to reflect an assumed increase in occupancy. It is also based on the calculation of per square foot occupancy on January 1, 2005, applied to the projected occupancy. This expense item will increase with the projected increase in occupancy.

Parking Lot & Grounds – The amount for this item is based on the 2004 expense, which the Buckles’ appraisal utilized. Although not specified in the Buckles narrative, items including landscaping, parking lot and snow removal from the 2004 expenses establish the actual expenses as shown above. The Hearing Officer concurs with the Buckles appraisal on this item given the historical expenses of the subject. The Lauer appraisal apparently included items which could be reported under this item in with repairs and maintenance.

Administrative – The Lauer appraisal did not allocate any expense for this item. The Buckles appraisal explained the item as office supplies, telephone and professional fee, and relied upon the historical expense of the subject for the $700 amount. The historical expenses for various items including but not limited to supplies, office expenses and other items warrants the allowance of $700.

Sub Division Fees – The expense history supports the amount of $3,740.

Security/Monitoring – The expense history supports the amount of $3,980.

Legal & Professional – The expense history supports the amount of $9,500.

Advertising – The expense history supports the amount of $3,000.

Miscellaneous – The expense history supports the amount of $1,500.

Reserves for Replacements – The Hearing Officer defers to the Lauer appraisal of an allowance of $15,250. A deduction for this expense item is warranted, even if no funds are actually being placed in a reserve account.

***

Hearing Officer Finds Net Operating Income

Subtracting the Operating Expenses of $482,200 from the Effective Gross Income of $1,300,135 results in a Net Operating Income of $817,935.

***

Capitalization Rate

Effective Tax Rate

The effective tax rate to be utilized in building the overall rate is 2.34%. Exhibit 1, p. 37, See also, Exhibit A, p. 46.

Buckles - Overall Rate

Mr. Buckles found from a survey of local sales transactions a range of overall rates from 9.82% to 12.81%, with an average of 10.1%. He developed a band of investment analysis using a loan ratio of 75%, a 6.25 interest rate, a 25 year term and an equity rate of 12.5%. This produced an overall rate of 9.062, called 9.1%. The appraiser settled on a 10.0% overall rate. Exhibit A, pp. 43-46.

Lauer – Overall Rate

Mr. Lauer utilized the Korpax Real Estate Investor Survey for the first quarter of 2005 which indicated a national range for overall cap rates for suburban office buildings. The range found was 6.5% to 10.5% with and average of 8.63%. The appraiser also relied upon his the rates indicated by two of his comparable sales which had overall rates of 8.5% and 8.64% Mr. Lauer also developed a band of investment analysis. He used a 80% loan, at 6% for 20 years with an equity rate of 9%. This produced an overall rate of 8.68%. The rate utilized was 8.65%. Exhibit 1, pp. 85-86.

Hearing Officer Finds Overall Rate

The evidence establishes overall rates from Complainant’s four sale comps and from two of Respondent’s sale comps. These rates are in the following range: 8.50%, 8.78%, 8.92%, 9.10%, 9.64%, 12.81%. Mr. Lauer considered but did not use a December, 2003 sale which had an indicated rate of 9.48%, because “this was a related party transaction.” According to the Lauer notes on this sale, his conclusion was based upon the vice-president of the grantor being the majority investor in the grantee LLP. However, he utilized the sale in his sales analysis but made no adjustment for the alleged “related party transaction.” Accordingly, the Hearing Officer is not persuaded the indicated overall rate on this sale should not also be considered.

The range for the seven market derived rates is from 8.5% to 12.81%, the median is 9.10%, with an average of 9.60. The two band of investment analysis come in at 8.68 and 9.10. The Hearing Officer concludes from the foregoing, giving weight to the average of all the market rates and both band of investment rates, an overall rate of 9.09.

Hearing Officer Finds Capitalization Rate

The Effective Tax Rate of 2.34 added to the Overall Rate of 9.09 results in a Capitalization rate of 11.43%, as compared to an average of the two rates found by the appraiser of 10.99% and 12.35% - average of 11.65%.

Value Under Income Approach

Capitalizing the Net Operating Income concluded above of $817,935 by the 11.43% rate results in an indicated value of $7,156,000 ($817,935 ÷ .1143 = $7,156,036, rounded to $7,156,000).

***

Cost Approach to Value

Having concluded an indicated value relying on the income approach, it is now appropriate to turn to an analysis of the evidence presented relating to the cost approach.

Land Value

Mr. Buckles relied upon four land sales and calculated adjusted per square foot values ranging from $5.74 to $10.82, with an average of $8.23. He concluded upon a per square foot land value of $7.50, or $1,515,000 for the tract. Exhibit A, pp. 23-28.

Mr. Lauer also utilized four land sales, different from those used in the Buckles appraisal. The sales had adjusted per square foot values ranging from $5.05 to $6.17, with an average of $5.49, which the appraiser used as his indicated land value. This resulted in a land value for the tract of $1,100,000.

Hearing Officer Finds Land Value

Giving equal weight to the conclusion of each appraiser, the Hearing Officer finds the per square foot land value for the subject to be $6.50. The subject tract contains 201,683 square feet of land, therefore the land value for purposes of the cost approach is $1,310,940 (201,683 x $6.50 = $1,310,939.50, rounded to $1,310,940).

Improvement Value

Replacement Cost New Less Physical Depreciation

Buckles Appraisal

The Buckles appraisal concluded a replacement cost new (RCN) for all improvements of $10,076,917. The appraiser then applied a deduction of 10% for physical depreciation. This was calculated using an effective age of improvements of 4 years with a remaining economic life of 36 years, or an economic life new of 40 years. The deduction for physical depreciation resulted in a replacement cost new less physical depreciation of $9,160,833. Exhibit A, pp. 29-34.

Lauer Appraisal

Mr. Lauer found a RCN for all improvements of $10,740,336. The Lauer deduction for physical depreciation was 7.3%. The appraiser calculated physical depreciation using an economic life expectancy new for the improvements of 55 years, with an effective age of 4 years. This produced a replacement cost new less physical depreciation of $9,956,291. Exhibit 1, pp. 63-67, 70.

Hearing Officer finds RCNLPD

Giving equal weight to the conclusions of each appraiser, the replacement cost new of the improvements less physical depreciation is $9,558,562.

Economic Obsolescence

Neither appraiser felt that the subject suffered from any functional obsolescence, due to its being only a four year old structure. The Hearing Officer concurs. However, both appraisers concluded a deduction had to be made to account for economic obsolescence due to the high vacancy which the property was experiencing. See, Exhibit A, pp. 31-34; Exhibit a, pp. 68-70.

Mr. Buckles arrived at his deduction for economic obsolescence by means of any analysis of the implied rent loss and a capitalization of the rent loss, based upon the capitalization rate which he utilized in his income approach. This analysis and calculations resulted in a deduction of 46.17% for economic obsolescence to arrive at replacement cost new lest depreciation.

Mr. Lauer also employed a rent loss analysis, using the capitalization rate which he had developed under his income approach. He also added any amount to account for expenses to be incurred under his absorption analysis developed in his income approach. This resulted in a 31.19% economic obsolescence deduction.

Hearing Officer Finds RCNLD

Giving equal weight to the percentage deductions derived by each appraiser provides an indicated deduction for economic obsolescence of 38.68%. Applying this to the RCNLPD produces the amount of $3,697,252 ($9,558,562 x .3868 = $3,697,252) as the amount to be deducted for economic obsolescence. When this is subtracted from the RCNLPD, the indicated replacement cost new less depreciation of the improvements is $5,861,310 ($9,558,562- $3,697,252 = $5,861,310).

Hearing Officer Finds Cost Approach Value

Adding the RCNLD ($5,861,310) to the Land Value ($1,310,940) provides an indicated value of $7,172,250 for the property on January 1, 2005.

Sales Comparison Approach to Value

Having developed both the Income and Cost Approaches to arrive at indicated values, the Hearing Officer now turns to an analysis of the evidence relating to the sales comparison approaches presented by the two appraisers.

Buckles Sales Comparables

Complainant’s appraiser relied upon four sales of properties he deemed to be comparable to the subject property for purposes of this appraisal problem. All are located in St. Charles County within the market area in which the subject would compete if offered for sale. The sales occurred in a time frame from November 2002 to March 2005. The land areas ranged from 1.62 to 4.96 acres. The gross building area of the comparables fell in a range from 18,312 to 77,180. Net rentable area for the properties was from 17,061 to 75,000. The improvements were from 5 to approximately 26 years in age.

The adjusted per square foot sales prices of the four comparables were $65.70, $73.68, $113.32 and $122.38, with an average of $93.77. Mr. Buckles concluded on a per square foot value of $85.00 in his appraisal.

Lauer Sales Comparables

Eight sale properties were used by Respondent’s appraiser in his sales comparison approach. One of Mr. Lauer’s comps was a comp used by Mr. Buckles. Three sales were from St. Charles County and five were from West St. Louis County. The sales occurred from May 2002 to March 2006. The acreages ranged from 2.31 to 23.65 acres. Gross building sizes were from 33,348 to 134,708 square feet. Net rentable areas were not reported. The age of improvements ranged from approximately 3 to 25 years.

The adjusted per square foot sales prices of the comparables were $93.14, $95.45, $97.50, $101.63, $102.97, $103.78, $106.03 and $113.72. The average adjusted per square foot value was $101.78, which was the value utilized by Mr. Lauer to arrive at the indicated value under his sales approach.

Hearing Officer Finds Sales Comparison Approach Value

The Hearing Officer upon review of both sales comparison approaches is more convinced than ever, that when addressing appraisal problems involving most commercial properties, this approach has such sufficient weaknesses that its probative value in many instances is relative small. The sales comparison approach finds its greatest strength in the valuation of single family residences. The variances between any two commercial properties of the same general sub-group, such as office buildings, is generally such that actually being able to derive adjustments for all differences from the market is virtually impossible.

The Hearing Officer recognizes that appraisers are educated and trained to develop this approach to value and that it is expected, within good appraisal practice, that the approach will be developed in each appraisal assignment when adequate sales data can be found. Although a good deal of time and space could be devoted in this Decision to addressing what the Hearing Officer finds to be various problems and weaknesses with both approaches, no benefit as to finding value would be served by such an exercise. Such an analysis is better left to a seminar or workshop on the subject.

Appraisers, when developing a sales comparison approach, cannot simply create sales comparables which fit exactly to the property being appraised. Appraisers can only rely on sales properties which they have access to through various data sources. Therefore, the Hearing Officer accepts that both Mr. Buckles and Mr. Lauer presented the best sale comparables which they could find and which they believed were appropriate to the problem. The Hearing Officer finds that all of the comparables were of sufficient similarity in land area, building size, age, condition, location and other general factors as to be utilized by the appraisers in this instance.

Likewise, the Hearing Officer is convinced that each appraiser applied his best judgment and experience in adjusting each property to arrive at an indicated value. Therefore, the Hearing Office will not attempt to substitute his experience in hearing of valuation cases for that of the appraisers in preparing appraisals to make additional adjustments to the individual sales.

The range for the sales presented by both appraisers was from $65.70 to $122.38, with the median being $102.30 and the average being $99.11. If equal weight were to be given to the opinions of per square foot value of each appraiser (Buckles - $85.00; Lauer $101.78) the indicated per square foot value for the subject property would be $93.39. Applying this to the gross building area determined for the property of 78,435 (Finding of Fact 2, page 3, supra) would yield an indicate value under the sales comparison approach of $7,325,045 ($93.39 x 78,435 = $7,325,044.65, rounded to $7,325,044.65).

This indicated value presents a value which is approximately 2.13% above the value determined above under the cost approach. The value indicated under the sales comparison approach is 2.36% over the value found by the income approach. This variance can be attributed to the lack of an adjustment in the sales comparison approach to account for the subject’s 40% vacancy in January 2005. Without such an adjustment, the indicated value under this approach is overstated. The indicated per square foot value under the income approach calculates to $91.23. The cost approach per square foot value is $91.44.

Reconciliation

The true value in money for the subject property, as indicated by the three approaches is:

Cost Approach	$7,172,250
Income Approach	$7,156,000
Sales Comparison Approach	$7,325,045

The Cost and Income Approaches provide very close indicators of fair market value, with less than a .0023 difference in cost over income. The Sales Comparison Approach unadjusted to account for the subject’s vacancy, although overstating the market value, still is within a close enough range to provide support for the valuation developed under the Income Approach.

The Hearing Officer finds the value indicated by the Income Approach is representative of what an informed investment purchaser would give and a willing seller would expect for the purchase of the property under appeal as it existed in January 2005.

The true value in money of the property as of January 1, 2005, is set at $7,156,000, assessed value of $2,289,920.

ORDER

The assessed valuation for the subject property as determined by the Assessor and sustained by the Board of Equalization for St. Charles County for the subject tax day is SET ASIDE.

The assessed value for the subject property for tax years 2005 and 2006 is set at $2,289,920.

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 2000.

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. Charles County, as well as the collectors of all affected political subdivisions therein, shall disburse the protested taxes presently in an escrow account, unless previously disbursed to the taxing jurisdictions pursuant to an order of the circuit court under Section 139.031(8), RSMo. If taxes have been disbursed under circuit court order, Complainant may apply to the circuit court having jurisdiction of the cause for disposition of the protested taxes held by the taxing authorities.