State Tax Commission of Missouri

SAV INVESTMENT CORPORATION, )

)

Complainant, )

v. ) Appeal Number 05-20009

)

ED BUSHMEYER, ASSESSOR, )

ST. LOUIS CITY, MISSOURI, )

)

Respondent. )

ORDER

SETTING ASIDE HEARING OFFICER DECISION

AND SETTING VALUE

History

The subject property is a seven-story apartment building, built in 1950, identified as locator number 5617-00-0070-0, more commonly known as 5522 Delmar Boulevard, St. Louis, Missouri. The property was originally valued by the St. Louis City Assessor at $620,400. Said value was approved by the Board of Equalization. Thereafter, Complainant appealed its assessment for tax years 2005 and 2006. An evidentiary hearing was held on November 21, 2006, and Senior Hearing Officer W.B. Tichenor issued his Decision and Order setting aside the Board value and determining value for the subject property of $411,540 on January 10, 2007. Thereafter, on February 8, 2007, Respondent appealing asserting that the Hearing Officer’s decision was erroneous, unreasonable, arbitrary, capricious and an abuse of discretion.

Issues on Appeal

Respondent raised the following issues on appeal:

1. The Hearing Officer erred in finding that the Sales Comparison Approach was not a reliable indicator of value.

2. The Hearing Officer improperly applied the Income Approach to Value.

3. The Hearing Officer erred in finding that Complainant had met its burden of proof.

4. The Hearing Officer’s decision conflicts with Tax Commission directives that

Respondent raise property values.

Holding

After reviewing all of the exhibits and the oral testimony, the Commission finds that the Hearing Officer was correct in discounting the Sales Approach as an indicator of value for the subject property. However, in accepting Complainant’s income approach based upon actual vacancy rates, the Hearing Officer did not give sufficient weight to the cost to cure deficiencies and erroneously found that Complainant had met its burden of proof. Respondent’s final allegation of error is an argument dealing with general conditions within the city and is an inappropriate consideration when determining value of a specific property.

The Hearing Officer’s decision is SET ASIDE. The Commission finds value to be $511,040 (assessed value $97,097).

FINDINGS OF FACT

1. Jurisdiction is proper. Complainant timely filed its appeal from the decision of the St. Louis City Board of Equalization.

Subject Property

2. The subject property is a seven-story, 48-unit apartment building built in 1950. The property is identified as parcel locator number 5617-00-0070-0, more commonly known as 5522 Delmar Boulevard, St. Louis, Missouri.

3. The subject property’s current usage is considered compatible with the surrounding land uses. Resp. Ex. 1, pg. 14. The highest and best use of the property is for continued use as multi-family residential property. Resp. Ex, 1, pg. 5. Cp. Ex. A, pg. 12. More specifically, the highest and best use of the property is for continued use as a multi-tenant apartment building. Cp. Ex. A, pg. 2.

4. Some renewal is occurring in the neighborhood. Cp. Ex. A, pg. 19, Resp. Ex. 1, pg. 11. In the early 1970’s improvements to infrastructure were made to foster urban renewal. However, the area, as a whole, has not realized the expectations associated with those infrastructure improvements. Cp. Ex. A, pg. 6. Overall condition of the properties range from in need of rehabilitation to totally refurbished. Resp. Ex. 1, pg. 11. Although some older apartment buildings have been rehabbed and sold, at least one has been rehabbed and is currently vacant. Resp. Ex. l, pg. 20-23; Tr. 67, 75-76. Respondent’s argument that income producing potential would not be important to purchasers because the most likely sale of the subject property would be for conversion into condominiums is not supported by a sufficient amount of market information and is not persuasive.

5. The subject property contains 7 two bedroom units and 41 efficiency and one bedroom units. The two bedroom units contain approximately 650 square feet each while the one bedroom units range from 400 to 500 square feet. Cp. Ex. A, pg. 8. Resp. Ex. 1, pg. 14. The one bedroom units are an efficiency design rather than typical one bedroom apartments. These units have a small kitchenette and a large central room with an adjoining room of approximately 8 x 8 feet which connects with the bathroom. Cp. Ex. A, pg. 8. Between 2003 and 2005, six units were renovated at a cost of $10,500 per unit. Resp. Ex. 1, pg. 14, Tr. 72. Fifteen units were not rentable on January 1, 2005 because of deferred maintenance. Resp. Ex. 1, pg. 14; Cp. Ex. A, pg. 10. Vacancies are predominately limited to the very smallest units containing 396 square feet, 404 square feet and some with 440 square feet. Cp. Ex. A, pg. 21-22. The cost to cure the deficiencies in these 15 units, to make the apartments rentable, is $12,500 per unit or $187,500. Resp. Ex. 1, pg. 18.

The Income Approach

6. Market rent for one bedroom apartments is $350 per unit while market rent for two bedroom apartments is $400 per unit. Resp. Ex. 1, pg. 18. The actual rents on the subject units vary with the average rent for one bedroom units of $332 per unit while the average rent for two bedroom units is $378. Cp. Ex. A, pg. 21-22. Given the size and condition of the units, it is reasonable to conclude that actual rent is market rent for these units. Therefore, the potential gross income from rent is $195,096. ($332 x 41 x 12 = $163,344; $378 x 7 x 12 = $31,752; $163,344 + $31,752 = $195,096).

7. The property has a 30% vacancy rate. Cp. Ex. A, pg. 10; Resp. Ex. 1, pg. 18. Market vacancy is 5% to 12%. Resp. Ex. 1, pg. 18. Utilizing a 30% vacancy rate produces a reduction in value that exceeds the cost to cure the deficiencies and substantially distorts value. Therefore, we find that the greatest vacancy rate applicable in this case is 12% or $23,411 ($195,096 x .12 = $23,411).

The inappropriateness of a high vacancy rate is supported by the fact that the property is being operated on a patchwork type basis with needed repairs being delayed until they must absolutely be done. Cp. Ex. A, pg. 10. The on-site manager indicates that the vacant units have been vacant for years; with little maintenance to rehabilitate the units into rentable condition. Resp. Ex. 1, pg. 14. Minimal efforts are being made to maintain the subject property. It is Complainant’s inaction rather than the market which is keeping the vacancy rate high.

8. In addition to rent, the subject property also has miscellaneous income of $1,000 per year. Therefore, the proper effective gross income of the subject property is $172,685. ($195,096 - $23,411 + $1,000 = $172,685).

9. Market expense ratios are 50% of potential gross income. Resp. Ex. 1, pg. 18, or $97,548. ($195,096 x. 50 = $97,548). Actual expenses are similar to market expenses inasmuch as Complainant’s potential gross income from rent is $193,860. Estimated expenses, before real estate taxes, are $98,170, leaving an indicated ratio of 51%. Cp. Ex. A, pg. 24.

10. The market supported reserve for replacement is 5% of potential gross income or $9,754 ($195,096 x .05 = $9,754.) Resp. Ex. 1, pg. 18.

11. The appraisers suggested a capitalization rate of between 7.5% and 8.6% was appropriate. Cp. Ex. A, pg. 24; Resp. Ex. 1, pg. 18. One appraiser’s discussion of capitalization rates is not more supportable than the other therefore, like the Hearing Officer, we find that the correct capitalization rate is 8.05% (8.6 + 7.5 = 16.1 divided by 2 = 8.05). Complainant’s appraiser placed real estate taxes into his equation as an expense and did not calculate an effective tax rate. Respondent’s appraiser handled taxes in his capitalization rate by calculating an effective tax rate of 1.31%. Respondent’s methodology is correct. The indicated capitalization rate for the subject property is 9.36%. (8.05% + 1.31% = 9.36%).

12. The market value for the subject property is calculated as follows:

Potential Gross Income	$195,096
Less: Vacancy (12%)	23,411
Plus: Miscellaneous Income	1,000
Equals: Effective Gross Income	172,685
Less: Expenses (50% of PGI)	97,548
Less: Reserves for Replacement (5% of PGI)	9,754
Equals: Net Operating Income	65,383
Capitalized @ .0936	698,536
Less: Cost to Cure	187,500
Equals: Market Value	$511,036 (say $511,040)

The Sales Comparison Approach

13. Complainant’s appraiser presented sales indicating unit values of $8,867; $12,142; $10,417; and $7,197. All of the sales occurred between two and four years prior to the relevant tax day, all buildings were older than the subject property, and all were in inferior locations. One building was vacant. Cp. Ex. A, pg. 19. The Hearing Officer’s conclusion that these sales are not reliable is reasonable and is supported by the evidence.

14. Respondent’s appraiser suggests that the most likely sale of the subject property would be for conversion to condos and presented sales indicating unit values of $15,167; $14,458; $41,085; and $28,000. One property was vacant and had been foreclosed upon. The fourth property was garden style apartments. Unlike the subject, all units in the comparables had separate furnaces. In order to attempt to value the subject under the Sales Comparison Approach, Respondent’s appraiser had to adjust the sales by 25%, 60%, 107% and 57%. Resp. Ex. 1, pg. 20-25. These sales are not sufficiently similar to the subject to indicate a value for the subject property. The Hearing Officer’s conclusion that these sales are not reliable is reasonable and is supported by the evidence.

The Cost Approach

15. Neither appraiser presented a cost approach and we find that a cost approach is not a reasonable way to value the subject property because of its age and condition.

CONCLUSIONS OF LAW

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).

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

Under Mo. Const., Article X, Section 14, the state tax commission corrects “any assessment which is shown to be unlawful, unfair, arbitrary or capricious.” Thus, in order to prevail, the taxpayer must establish that the decision of the board of equalization falls into one of the above four categories. If a taxpayer fails to make the required showing, it will not prevail, regardless of the amount of evidence – or lack of evidence -- presented by the county.

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. 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. Snider v. Casino Aztar/Aztar Missouri Gaming Corp., 156 S.W.3d, 341, 347-348 (Mo. 2005).

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

The Commission must look at all relevant factors when trying to determine value. We may look at actual income and expenses as well as market income and expenses. However, relying only on an individual property’s performance, particularly where there may be a deficiency in management, is simplistic and risks valuing the property in use rather than in exchange. The purpose of using market data, when available, is to avoid atypical influences.

We must also look at the cost to cure deficiencies. Where market based performance can be attained by curing deficiencies, the maximum adjustment is the cost to cure those deficiencies.

Both buyers and sellers would consider actual income, market income and cost to cure when making their purchasing and selling decisions.

ORDER

The Decision of the Hearing Officer is SET ASIDE. The Commission sets value at $511,040 (assessed value $97,097). The Clerk is HEREBY ORDERED to place said new assessed value on the tax books for tax years 2005 and 2006.

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 April 19, 2007.

STATE TAX COMMISSION OF MISSOURI

Bruce E. Davis, Chairman

Jennifer Tidwell, Commissioner

Charles Nordwald, Commissioner

DECISION AND ORDER

HOLDING

Decision of the St. Louis City Board of Equalization sustaining the assessment made by the Assessor is SET ASIDE. Hearing Officer finds presumptions of correct assessment rebutted. True value in money for the subject property for tax years 2005 and 2006 is set at $411,540, assessed value at 19% of $78,190.

Complainant appeared by Counsel, Thomas R. Green, St. Louis, Missouri.

Respondent appeared by Counsel, Carl w. Yates III, Associate County Counselor.

Case heard and decided by Senior Hearing Officer W. B. Tichenor.

ISSUE

The Commission takes this appeal to determine the true value in money for the subject property on January 1, 2005.

SUMMARY

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. 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).

Actual Income Stream Persuasive

Complainant’s evidence provided the necessary income and expense data from which a determination of value under the income approach could be calculated. The use of actual income, expenses and vacancy is appropriate for this appraisal problem. Maryville Properties, LP v. Nelson, STC Appeal No. 97-74500; Lake Ozark Village v. Whitworth, STC Appeal Nos. 97-47000, 99-47003 & 01-47002; Mitchell Avenue Shopping Center v. Van Meter, STC Appeal 03-45014 (Commission Decision, 4/14/05). A well informed investor would take into account the overall condition of the subject apartment building. The various items of deferred maintenance and the archaic heating system are significant matters which impact on the level of rent which this facility can obtain, as well as, the level of expenses. The rents being received on the subject are reflective of market rents on similar apartment buildings. Exhibit A, pp. 15, 16, & 18. The higher level of expenses and vacancy are attributable to the subject’s general inferior condition.

The actual income stream being generated by the subject as of January, 2005 would most influence prospective purchasers. That income stream would reasonably support a purchase price of $411,540. Only by ignoring the actual performance of the subject and applying higher than actual rents, a lower than actual vacancy rate and lower than actual expenses can a higher indicated value be established and supported. A knowledgeable purchaser would have not ignored such factors.

Sales Comparison Approach Not Persuasive

Reliance on a sales comparison approach presents significant problems when valuing a property such as the subject. Although properties which are suitably comparable in age, location, number of apartments, unit size and general amenities can be found, such properties do not necessarily represent sufficient comparables for the purpose of establishing fair market value. When valuing rental properties under a sale comparison analysis, the level of rents, vacancy and income for each comparable property are significant. If those items are not in close proximity to the actual rents, vacancy and income being realized by the property being valued, then adjustments must be made for those factors to bring the comparables in line with how the property to be valued is performing in producing its stream of income.

Adjustments for differences in number of apartments, size of units, age, location and other physical characteristics are generally very subjective. Seldom, if ever is there substantial market data from paired sales which will provide a solid basis to support adjustments for each and every one of these factors. Often a reliance on the median sales price per unit from a sufficient number of sale properties may produce as sound a basis for valuation as a value derived from percentage or dollar adjustments which are not adequately market derived and supported.

Once adjustments have been made to sale comparables, the indicated value which is concluded by the appraiser should be checked against the actual income being produced by the appraised property. If actual net operating income will not support the indicated value derived from the sales comparison analysis, then adjustments for physical features have not captured the economic differences between the sale properties and the appraised property, irrespective of the extent to which adjustments have brought the properties into line for physical differences. On the other hand, if the actual income stream supports a value in excess of what has been developed from the sales analysis, then the adjustments for physical features have undervalued the property being appraised.

In the present case, the economic data on the sale properties presented by both appraisers is very limited. It is understood that often an appraiser is not able to get all of the income and expense data on comparable properties which is desired. Neither Mr. Kauffmann nor Mr. Knopp presented income, vacancy and expense data on any of the sale properties, from which a net operating income could be calculated. It can reasonably be assumed they were not privy to such information and therefore were unable to provide it or to utilize it in developing their sale comparison approaches.

The adjusted and unadjusted sales data from the two appraisers presents such a variance that sound reliance cannot be placed on a conclusion of value based on either sales comparison approach. Nor can the two approaches be combined or melded to establish a substantial and persuasive indicator of value. Mr. Knopp’s unadjusted per unit values were $15,167, $24,458, $41,085 and $28,000. Mr. Kaufmann’s unadjusted per unit values were $8,667, $12,143, $10,417 and $7,197. Such a great level of variance among eight different sale properties casts doubt on both sale comparison analyses. In the face of actual economic data on the performance of the subject, the sales data on this record is unpersuasive for establishing fair market value.