State Tax Commission of Missouri
| WEST HOTEL, LLC | ) | ||
| ) | |||
| Complainant, | ) | ||
| ) | Appeal No. | 18-11220 | |
| v. | ) | ||
| ) | |||
| JAKE ZIMMERMAN, ASSESSOR, | ) | ||
| ST. LOUIS COUNTY, MISSOURI, | ) | ||
| Respondent. | ) |
DECISION AND ORDER
West Hotel, LLC, (Complainant) appeals the St. Louis County Board of Equalization’s (BOE) decision finding the true value of the subject property was $25,000,000. Complainant claims the property was overvalued.
The hearing officer conducted an evidentiary hearing.[1] Both parties presented substantial and persuasive evidence establishing overvaluation. True Value of the subject property was $18,360,000 (commercial assessed value of $5,875,200).
FINDINGS OF FACT
A. The Subject Property.
1. The property is located at 660 Maryville Centre Drive, St. Louis County, Missouri. It is identified as parcel number 19Q610225.
2. The property is a 6.31 acre lot improved with a full-service hotel. The hotel is approximately 203,357 square feet, with nine stories and 299 rooms. The amenities include a restaurant and lounge; meeting and function space; swimming pool; exercise room; business center; and a separate multi-level garage.
3. The hotel was constructed in 1991.
4. The hotel operates under the Marriott franchise.
5. The property was purchased in 2018 for approximately $22,500,000. The sale included the real, personal and intangible property. The sale required property improvements to address the excessive wear and tear to the hotel to maintain the Marriott branding. The estimated cost of the improvements was $20,447,231 or $44,860 per room.
B. Assessment
6. Respondent determined the property’s true value in money was $25,000,000 and determined the proper classification was commercial. The Board of Equalization determined the property’s true value in money was $25,000,000 and determined the proper classification was commercial.
C. Complainant’s Appeal
7. Complainant timely appealed to the State Tax Commission (Commission).
8. Complainant alleged the subject property was overvalued by Respondent.
D. Overvaluation Claim
9. Complainant presented the following exhibits:
| EXHIBIT | DESCRIPTION |
| A | Appraisal Report of Gary Andreas |
| B | Written Direct Testimony of Gary Andreas |
| C | Three years of Financial Records |
| D | Property Condition Report |
| E | Report on Roof |
10. Gary Andreas is a Missouri Certified General Appraiser employed by H&H Financial Group, Inc. He has thirty years experience in appraising hotel properties and other “hospitality” properties.
11. Hotels are businesses with real estate, tangible personal property and intangible assets. The property subject to the appeal is limited to the real property, i.e., land and improvements.
12. The appraiser developed the income approach using the direct capitalization method.
13. A report dated February 1, 2018 detailed the condition of the subject property. The report detailed that the property exhibited excessive wear and tear indicating that the property was not adequately maintained. Significant items of deferred maintenance were observed including the roof. The roof would need to be replaced. The estimated cost to replace the roof was almost $1,000,000.
14. The appraiser developed the “Rushmore Approach” to value the subject property. The Rushmore Approach excludes the value of and income derived from furniture, fixtures, and equipment (FF&E) and makes adjustments for the replacement of the property and the return on the property. Rushmore Approach also accounts for the business valuation by deducting management and franchise expenses.
15. The appraiser opined revenues at $13,260,400 and a net operating revenue of $5,633,900. He estimated the management fees to be $530,416 or 4% of revenues. He based his estimate on history of the property and review of the expense statements. According to the appraiser, management fees range from 3.5% to 5%.
16. The appraiser estimated the franchise fees at $1,286,643. Marriott requires 6% of gross room revenues, 3% of food and beverage revenues, an additional 1% of gross room revenues for marketing and 5% of gross room revenues for reservation fees. Historically, the total fees ranged from 9.9 to 11.3%.
17. The appraiser made adjustments for a return on and return of personal property. For return of personal property, the appraiser used the straight-line method. He estimated replacement cost of personal property to be $25,000 per room for a total of $7,475,000. Replacement cost per room was based upon Rushmore’s HVS Hotel Development Survey. He estimated the life of the assets to be 7 years. The return of personal property was $1,067,957. The return on personal property was calculated using the market value of existing FF&E as reported by the Respondent in 2016 of $1,171,400 and applying a loaded capitalization rate for personal property of 11.83% or $138,549.
18. The appraiser opined a loaded capitalization rate for the real property of 12.46[2]% using a 9.51% base with a 2.94% effective tax rate.
19. The appraiser concluded a value for the property as of January 1, 2018 based upon economic conditions as of January 1, 2017 of $16,700,000.
20. The appraiser appraised property for a bank at the time of the purchase of the property. (Exhibit R1)
21. The bank appraisal and the appraisal for the Commission differed.
22. The appraiser testified to the differences between the appraisal reports. The appraisal report filed for this appeal (“Commission report”) is the valuation of the property as of January 1, 2017. The bank appraisal is the valuation of October 2018. The Commission report opined the true value of the land and improvements only. The bank appraisal valued the land, improvements, personal property and the business value; the bank appraisal was valuing the going concern for financing. The bank appraisal determined the depreciated replacement cost not the true value. The bank appraisal considered the property improvement plan. The bank appraisal utilized the discounted cash flow method to determine a stabilized value.
23. The appraiser did use a replacement cost per room for personal property in the Commission appraisal of $25,000 and in the bank appraisal he used $22,500. The appraiser conceded that he should have used the same figure in each appraisal report. He testified that he should have used $25,000 in each report given Steven Rushmore’s HVS reported cost of $28,300.
24. The appraiser used estimated revenues for 2017 because the valuation date was January 1, 2017.
25. The evidence presented by Respondent included:
| EXHIBIT | DESCRIPTION |
| 1 | Appraisal Report of Brett Moore |
| 2 | Written Direct Testimony of Brett Moore |
| 3 | Agreement for Sale and Purchase of Property |
| 4 | Certificate of Value |
| 5 | Deed of Trust |
| 6 | Closing Statement |
| 7 | St. Louis Business Journal Article dated 8/1/18 |
| 8 | St. Louis Business Journal Article dated 10/17/18 |
| Rebuttal | |
| R1 | Appraisal Report of Gary Andreas (Bank appraisal) |
26. Exhibits 1-4[3] and R1 (for limited purpose) were admitted into evidence.
27. Brett Moore is a Missouri Certified General Appraiser employed by St. Louis County. The appraiser has been a general appraiser for over ten years and has been appraising property since 1999. The appraisal on the subject property was his first appraisal of a hotel property.
28. The appraiser developed the “Rushmore Approach” to value the subject property.
29. The appraiser opined revenues at $13,212,778 and a net operating revenue of $5,794,000. He estimated the management fees to be $395,000 or 3% of revenues. He based his estimate on history of the property and review of the expense statements.
30. The appraiser estimated the franchise fees at 11% of revenues or $1,453,405. His estimate was based upon the review of the company’s historical expenses.
31. The appraiser made adjustment for a return on and return of personal property. For return of personal property, the appraiser used the percentage of revenue method. His authority is a Valuation of Hotels and Motels for Assessment Purposes article by Stephen Rushmore written in 1984. In the article, Rushmore indicated the industry norms range from 2.5% to 5% of revenues depending on the year of operation. Since the subject property is 26 years old, the appraiser used 5% or $660,639. The appraiser calculated a return on personal property using the market value of existing FF&E as reported to the Respondent in 2017 of $813,200 and applying a loaded capitalization rate for personal property of 12.51% or $101,791.
32. Reserves for replacement of building and site improvements was calculated using the estimated the cost of the roof and dividing it by the estimate life of 16 years or $56,906. The appraiser estimated reserves for replacement of other items based on $810 per room.
33. The appraiser opined a loaded capitalization rate for the real property of 12.94% calculated using a 10% base with a 2.94% effective tax rate.
34. The appraiser opined a value of the land and improvements of $22,500,000.
E. Value
35. The true value of the subject property as of January 1, 2018 under the economic conditions of January 1, 2017 is $18,360,000.
CONCLUSIONS OF LAW AND DECISION
- Authority
The Commission has authority, “under such rules as may be prescribed by law, to hear appeals from local boards in individual cases and, upon such appeal, to correct any assessment which is shown to be unlawful, unfair, arbitrary or capricious.” Mo. Const. art. X, § 14. Section 138.430.1[4] authorizes the Commission to hear appeals concerning assessment, valuation, the method or formula used in determining valuation, or the assignment of a discriminatory assessment. “The commission shall investigate all such appeals and shall correct any assessment or valuation which is shown to be unlawful, unfair, improper, arbitrary or capricious.” Id. “To hear and decide appeals pursuant to section 138.430, the commission shall appoint one or more hearing officers.” Section 138.431.1. The hearing officer “shall issue a decision and order affirming, modifying, or reversing the determination of the board of equalization, and correcting any assessment which is unlawful, unfair, improper, arbitrary, or capricious.” Section 138.431.5.
- True Value in Money
All real property and tangible personal property must be assessed at its value or a percentage of its value as fixed by law for each class and for each subclass. Mo. Const. art. X, sec. 4(a), 4(b). Section 137.115.5(1)(c) provides commercial property is assessed at 19% of its true value in money. The true value in money “is an estimate of the fair market value on the valuation date.” Hermel, Inc. v. State Tax Comm’n, 564 S.W.2d 888, 897 (Mo. banc 1978). The fair market value is “the price which the property would bring from a willing buyer when offered for sale by a willing seller.” Mo. Baptist Children’s Home v. State Tax Comm’n, 867 S.W.2d 510, 512 (Mo. banc 1993). Determining the true value in money is a factual issue. Parker v. Doe Run Co., 553 S.W.3d 356, 360 (Mo. App. 2018).
- Evidentiary Standards
The hearing officer is the trier of fact and determines the credibility and weight of the evidence. Citizens for Rural Pres., Inc. v. Robinett, 648 S.W.2d 117, 132 (Mo. App. 1982); see also Exch. Bank of Mo. v. Gerlt, 367 S.W.3d 132, 136 (Mo. App. 2012) (the trier of fact determines credibility and is free to disbelieve all or part of a party’s evidence). The hearing officer is not bound by any single formula, rule or method in determining true value in money, and “is free to consider all pertinent facts and estimates and give them such weight as reasonably they may be deemed entitled to.” St. Louis Cty. v. State Tax Comm’n, 515 S.W.2d 446, 450 (Mo. 1974); see also Kelly v. Mo. Dep’t of Soc. Servs., Family Support Div., 456 S.W.3d 107, 111 (Mo. App. 2015) (the relative weight of any relevant factor is for the administrative hearing officer to decide). “Although technical rules of evidence are not controlling in administrative hearings, fundamental rules of evidence are applicable.” Mo. Church of Scientology v. State Tax Comm’n, 560 S.W.2d 837, 839 (Mo. banc 1977).
- Complainant’s Burden of Proof
A taxpayer challenging the assessment, valuation, the method or formula used in determining valuation, or the assignment of a discriminatory assessment bears the burden of proving the assessment or valuation was “unlawful, unfair, improper, arbitrary or capricious.” Section 138.430.1; Westwood P’ship v. Gogarty, 103 S.W.3d 152, 161 (Mo. App. 2003).
The BOE’s valuation is presumed correct, but the taxpayer may rebut this presumption with “substantial controverting evidence.” Hermel, Inc. v. State Tax Comm’n, 564 S.W.2d 888, 895 (Mo. banc 1978) (quoting Cupples Hesse Corp. v. State Tax Comm’n, 329 S.W.2d 696, 702 (Mo. 1959)).[5] Substantial evidence is evidence which “has probative force upon the issues . . . and from which the trier of fact can reasonably decide the case on the fact issues.” Cupples Hesse, 329 S.W.2d at 702 (internal quotation omitted).
If the taxpayer produces substantial evidence rebutting the BOE presumption, “the burden of proof on the facts and inferences would still rest on petitioner, for it is the moving party seeking affirmative relief.” Cupples Hesse, 329 S.W.2d at 702. To prevail, the taxpayer must produce “persuasive” evidence sufficient to convince the trier the disputed fact has been established. White v. Dir. of Revenue, 321 S.W.3d 298, 305 (Mo. banc 2010); see also Daly v. P.D. George Co., 77 S.W.3d 645, 651 (Mo. App. 2002) (evidence is persuasive when it has “sufficient weight and probative value to convince the trier of fact”).
- Sale of Subject
Evidence of the actual sales price of property is admissible to establish value at the time of an assessment, provided that such evidence involves a voluntary purchase not too remote in time. The actual sale price is a method that may be considered for estimating true value. The actual sales price, between a willing seller who is not obligated to sell and a willing buyer who is not compelled to buy, establishes an outer limit on the value of real property. St. Joe Minerals Corp. v. STC, 854 S.W.2d 526 (App. E.D. 1993).
The subject property was purchased in October 2018 for $22,500,000. The sale price included the personal property and intangibles.
- Valuation of Hotel
Both Complainant’s and Respondent’s appraisers developed the income approach, more specifically, the income approach for hotel valuation commonly referred to as the Rushmore Method.
“The income capitalization approach is generally the preferred technique for appraising income-producing properties because it closely simulates the investment rationale and strategies of knowledgeable buyers. The approach is particularly relevant to hotel and motel properties, which involve relatively high risks and are bought for investment purposes only. Most of the data used in the income capitalization approach is derived from the market, which reduces the need for unsupportable, subjective judgments. … Of the three valuation approaches available to the appraiser, the income capitalization approach generally provides the most persuasive and supportable conclusions when valuing a lodging facility.”[i]
For the present appraisal problem, the income approach is the appropriate methodology to be applied. This approach best indicates what an investor purchaser would consider in concluding a purchase price under the hypothetical purchase of the property under appeal on January 1, 2018 under the economic conditions of January 1, 2017.
Each party presented an appraisal report and testimony. Each appraiser developed the Rushmore Approach to value the property. Components of the appraisers’ approach can be compared:
| Complainant | Respondent | |
| Net Operating Revenue | $5,633,900 (Ex A. 44) | $5,794,000 (Ex 1 30) |
| Management Expenses | 530,416 (4%) | 395,000 (3%) |
| Franchise Fee | 1,286,643 (Ex A 46) | 1,453,405 (11%) |
| Return of Personal Property | 1,067,857 (Ex A 47) | 660,639 (Ex 1 33) |
| Return on Personal Property | 138,545 (Ex A 48) | 101,791 (Ex 1 34) |
| Reserve for Replacement | 530,416 (Ex A 49) | 299,096 (Ex 1 34) |
| Net Operating Income | $2,080,19 (Ex A 49) | $2,884,069 (Ex 1 35) |
| Capitalization rate | 12.46% (Ex A 51) | 12.94% (Ex 1 35) |
| Indication of Value | $16,700,000 | $22,290,000 |
A review of both appraisal reports provides evidence to establish the value of the subject property. Complainant’s estimate of revenue was persuasive. Both parties presented evidence of management fees. Both appraisers evidence was persuasive. Complainant’s evidence as to franchise fees is persuasive. For return of personal property, Complainant’s use of $22,500 used in his appraisal for financing was persuasive. Return on the personal property is calculated utilizing the value submitted by Complainant for the 2017 assessment, $831,681, and application of a capitalization rate of 12.32%. Complainant’s reserve for replacement calculation for the real property (?) is most persuasive.
| Amount | |
| Net Operating Revenue | $5,633,900[6] |
| Management | 464,114[7] |
| Franchise Fee | 1,286,643[8] |
| Return of Personal Property | 961,071[9] |
| Return on Personal Property | 104,043[10] |
| Reserve for Replacement | 530,416[11] |
| Total | 2,287,613 |
| Cap rate | 12.46% |
| Indication of Value | $18,359,654.90
Say $18,360,000 |
CONCLUSION AND ORDER
The BOE decision is set aside. The true value in money of the subject property is $18,360,000. The assessed value is $5,875,200.
Application for Review
A party may file with the Commission an application for review of this decision within thirty days of the mailing date set forth in the Certificate of Service for this Decision. The application shall contain specific facts or law as grounds upon which it is claimed the decision is erroneous. Said application must be in writing addressed to the State Tax Commission of Missouri, P.O. Box 146, Jefferson City, MO 65102-0146, or emailed to Legal@stc.mo.gov, and a copy of said application must be sent to each person listed below in the certificate of service.
Failure to state specific facts or law upon which the application for review is based will result in summary denial. Section 138.432, RSMo.
Disputed Taxes
The Collector of St. Louis County, as well as the collectors of all affected political subdivisions therein, shall continue to hold the disputed taxes pending the possible filing of an Application for Review, unless said taxes have been disbursed pursuant to a court order under the provisions of Section 139.031.8 RSMo.
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 this 3rd day of February
STATE TAX COMMISSION OF MISSOURI
Chief Counsel
Certificate of Service
I hereby certify that a copy of the foregoing has been sent electronically or mailed postage prepaid this 3rd of February, 2020, to: Complainant(s) and/or Counsel for Complainant(s), the County Assessor and/or Counsel for Respondent and County Collector.
Thomas Caradonna, Tcaradonna@lewisrice.com
Ed Corrigan, ecorrigan@stlouisco.com
St. Louis County Assessor, stc-correspondence@stlouisco.com
St. Louis County Collector, mdevore@stlouisco.com
Elaina McKee, Legal Coordinator
[1] Complainant appeared by Counsel Thomas Caradonna. Respondent appeared through counsel Ed Corrigan.
[2] 9.51% + 2.94% = 12.45%. The rates are limited to two decimal points for the appraisal report.
[3] Complainant objected to Exhibits 3-8.
[4] All statutory citations are to RSMo 2016.
[5] Section 138.060.1 provides “[t]here shall be no presumption that the assessor’s valuation is correct.” The plain language of the statute negates the former presumption the assessor’s valuation is correct, but leaves intact the longstanding presumption the BOE’s valuation is correct. Cohen v. Bushmeyer, 251 S.W.3d 345, 348 n.2 (Mo. App. 2008); see also Parker, 553 S.W.3d at 360.
[6] Complainant’s net operating revenue
[7] 3.5% of $13,260,400 (Complainant’s appraiser’s opinion of revenues)
[8] Complainant’s appraiser’s opinion of franchise fees based upon historical information, contract for the hotel, and his opinion of revenue
[9] Estimate of $22,500 per room per bank appraisal, for 299 rooms, at 7 year life
[10] 2017 valuation of FF&E of $831,681 submitted by Complainant to Respondent and using a capitalization rate of 12.51 of Respondent.
[11] Complainant’s reserve for replacement
[i] Rushmore, pp. 214, 236