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). While Complainant’s evidence standing alone meets the required standard, the Hearing Officer must consider the entire evidentiary record to arrive at a determination of true value in money.

Post-Hearing Brief Exhibits

Complainant’s Brief Exhibits 1 & 2

Complainant’s Brief was accompanied by Brief Exhibit 1, a recalculation of a table appearing on page 88 of the Lauer appraisal that addressed the matter of the anticipated expenses during absorption of the subject’s vacant space. The recalculation demonstrated in Exhibit 1 was based upon the cross-examination testimony of the appraiser. Exhibit 1 was 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 develop 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. However, in any case in St. Charles County where the assessor presents evidence which indicates a valuation higher than the value finally determined by the assessor or the value determined by the board of equalization, whichever is higher, for that assessment period, such evidence will only be received for the purpose of sustaining the assessor’s or board’s valuation, and not for increasing the valuation of the property under appeal. Section 138.060, RSMo; 12 CSR 30-3.075. Under the statute and the Commission rule the appraisal report and testimony of Mr. Lauer cannot be considered for the purpose of increasing the fair market value of the subject above $4,713,000. Since all three approaches developed by Mr. Lauer conclude values in excess of $5,400,000, those opinions of value cannot be given any probative weight for the purpose of establishing or support a value of $5,400,000.

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. 27-29, 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 443,159 square feet. The total square foot vacancy for these properties was 129,468 or 29.21%. 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%, 29.6%, 41.5%, 40.7% 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, 30,992, 19,550, 17,700, 8,200, 6,197 and 18,500.

Subject’s Vacancy History

The subject property (43,294 square feet rentable area) suffered from a vacancy in January 2005 of 12,629 or 29.17%. In January 2003 the subject was 43.88% vacant. By January 2004 it was at 40.73%.

Buckles Stabilized Vacancy Rate

Based upon the Class “A” office space study and the subject’s actual vacancy history, Mr. Buckles concluded on a 29.17% vacancy rate, or the actual vacancy for purposes of developing his income approach. This was expressed in the income approach in terms of the actual amount of rent income attributable to the 2^nd and 3^rd floor vacant space. Exhibit A, p. 37.

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 29%. 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 29%, 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, would result in a variety of changes to the calculations and 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 29.17%. Furthermore, the evidence of the vacancy rates of eight other St. Charles County Class A office buildings in January 2005 in excess of 29%, 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 13,000 vacant square feet would be competing with eight other properties located in the subject’s immediate area having over 129,000 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. 71), 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 29.17% 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 $24.75 in 2002 to $22.00 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 was virtually identical to the average from the most relevant market data in the record and must be given significant 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 that actually came close to the average net operating income would actually be valued at what would be close to market value under the income approach.

When valuing any individual property under the income approach, it must be recognized that 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 arm’s-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.

Lauer Corrected Valuation

Utilizing the vacancy rate as concluded above, the Hearing Officer performed a corrected valuation under the income approach to the Lauer appraisal to determine if it would provide an indicated value which was not in excess of $4,713,000. However, the indicated value determined utilizing the corrected vacancy rate was still in excess of the Assessor’s original value, therefore, under Section 138.060, RSMo and 12 CSR 30-3.075 it could only be used in support of the value of $4,713,000. A further analysis of the Lauer cost approach, making a deduction for economic depreciation based upon the corrected vacancy rate and capitalizing lost rent, did not yield an indication of value which fell below the Assessor’s value. The Lauer appraisal did not attempt any adjustment to his sale comparables to account for the vacancy of the subject. Although the Hearing Officer could have calculated and made adjustments to the Lauer sale comparables which he believes would account for the subject’s vacancy, to conduct such an analysis would move the Hearing Officer from weighing evidence to preparing an appraisal. Accordingly, the Hearing Officer elected to not assume that role.

Weight To Be Given Lauer Appraisal

The Hearing Officer cannot simply ignore the Lauer appraisal. To do so would be to ignore the rule of the Commission that it is to be received for the purpose of sustaining the Assessor’s value. Likewise, the Hearing Officer cannot ignore Complainant’s evidence which rebuts the presumption of correct assessment and establishes value, but for the Lauer appraisal, which while also rebutting the Assessor’s value, supports it. The line of reasoning being that the Lauer appraisal on its own establishes that the property under appeal must be at least worth $4,713,000, the value set by the Assessor. Furthermore, under 12 CSR 30-3.075 the Lauer appraisal must be given weight as supporting a value of no more than $4,713,000. To fail to give it that weight, would be in effect striking the appraisal and the Lauer testimony from the record, which would be contrary to the rule.

True Value in Money of Subject

The Hearing Officer gives equal weight to the Buckles conclusion of value and the value set by the Assessor, as supported by the Lauer appraisal, in accordance with 12 CSR 30-3.075 and finds true value in money as of January 1, 2005, to be $4,436,500.