State Tax Commission of Missouri
CALLAWAY VILLAGE APARTMENTS,)
)
Complainant,)
)
v.)Appeal No.07-46502
)
DANIEL ROE, ASSESSOR,)
CALLAWAY COUNTY, MISSOURI,)
)
Respondent.)
ORDER
AFFIRMING HEARING OFFICER DECISION
UPON APPLICATION FOR REVIEW
On May 6, 2009, Hearing Officer Maureen Monaghan entered her Decision and Order (Decision) setting aside the assessment by the Callaway County Board of Equalization.
Respondent timely filed his Application for Review of the Decision.Complainant timely filed its Response.
CONCLUSIONS OF LAW
Standard Upon Review
The Hearing Officer is not bound by any single formula, rule or method in determining true value in money, but is free to consider all pertinent facts and estimates and give them such weight as reasonably they may be deemed entitled.The relative weight to be accorded any relevant factor in a particular case is for the Hearing Officer to decide.[1]
The Hearing Officer as the trier of fact may consider the testimony of an expert witness and give it as much weight and credit as she may deem it entitled to when viewed in connection with all other circumstances.The Hearing Officer is not bound by the opinions of experts who testify on the issue of reasonable value, but may believe all or none of the expert’s testimony and accept it in part or reject it in part.[2]
The Commission will not lightly interfere with the Hearing Officer’s Decision and substitute its judgment on the credibility of witnesses and weight to be given the evidence for that of the Hearing Officer as the trier of fact.[3]
A review of the record in the present appeal provides support for the determinations made by the Hearing Officer and the methodology used to determine the true value in money of property.There is competent and substantial evidence to establish a sufficient foundation for the Decision of the Hearing Officer.A reasonable mind could have conscientiously reached the same result based on a review of the entire record. The Commission finds no basis to support a determination that the Hearing Officer acted in an arbitrary or capricious manner or abused her discretion as the trier of fact and concluder of law in this appeal.[4]The Hearing Officer did not err in her determinations as challenged by Complainant.
It is within the State Tax Commission’s discretion to determine what method or approach it shall use to determine the true value in money of property.[5]The correct methodology for valuing subsidized housing projects is the methodology set out in Maryville Properties and used by the State Tax Commission in subsequent cases.The methodology was followed by the Complainant and adhered to by the Hearing Officer.The methodology is accurate because (1) rent restrictions are considered through the use of actual income rather than market income; (2) additional management requirements and expenses are accounted for through use of actual expenses which are in excess of market expenses; and (3) the actual loan-to-value ratio and the subsidized interest rate demonstrates and accounts for any and all risks involved in the property as well as the benefits flowing to the property.
As to the calculation of the value of the equity portion of the capitalization rate, the State Tax Commission, in Sixth Street Partners,[6] stated that “someone familiar with the process of determining capitalization rates must review the market and estimate the appropriate capitalization rate for the equity portion of this equation.”The Complainant’s expert complied with the prior decisions of the State Tax Commission when determining an equity dividend rate.
The Complainant’s expert testified that he researched the market capitalization rates and concluded on an overall rate.The expert did adjust the rate due to the property being a subsidized housing project, however, adjusting the rate due to the property being a subsidized housing project is not warranted.As stated in Crystal City/Festus Partnership v. Jefferson County Assessor,[7] “[i]t is not wholly clear that individuals who invest in subsidized housing projects are placing their funds at higher risk than other investments which would warrant a [higher] equity dividend rate.Likewise, it has not been established that this investment is reasonably safe warranting a [lower market] equity dividend rate.” [8]Therefore adjustment to the rate for the equity portion of this equation was not proper.
DECISION
A review of the record in the present appeal provides support for the determinations made by the Hearing Officer.There is competent and substantial evidence to establish a sufficient foundation for the Decision of the Hearing Officer.A reasonable mind could have conscientiously reached the same result based on a review of the entire record. The Commission finds no basis to support a determination that the Hearing Officer acted in an arbitrary or capricious manner or abused his discretion as the trier of fact and concluder of law in this appeal.[9]
The Hearing Officer did not err in her determinations as challenged by Complainant.
ORDER
The Commission upon review of the record and Decision in this appeal, finds no grounds upon which the Decision of the Hearing Officer should be reversed or modified.Accordingly, the Decision is affirmed.The Decision and Order of the hearing officer, including the findings of fact and conclusions of law therein, is incorporated by reference, as if set out in full, in this final decision of the Commission.
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 mailing date set forth in the Certificate of Service for this Order.
If judicial review of this decision is made, any protested taxes presently in an escrow account in accordance with this appeal shall be held pending the final decision of the courts unless disbursed pursuant to Section 139.031.8, RSMo.
If no judicial review is made within thirty days, this decision and order is deemed final and the Collector of Callaway County, as well as the collectors of all affected political subdivisions therein, shall disburse the protested taxes presently in an escrow account in accord with the decision on the underlying assessment in this appeal.
SO ORDERED February 2, 2010.
STATE TAX COMMISSION OF MISSOURI
Bruce E. Davis, Chairman
Bill L. Ransdall, Commissioner
DECISION AND ORDER
HOLDING
Decision of the Callaway County Board of Equalization sustaining the assessment made by the Assessor is SET ASIDE.True value in money for the subject property for tax years 2007 & 2008 is set at $1,065,818, residential, assessed value $202,505.
ISSUE
The issue in this case is the true value in money of the subject property for tax years 2007 and 2008.
SUMMARY
Complainant appeals the assessment of its subsidized housing apartment complex.The Callaway County Assessor determined, and the Board of Equalization affirmed, that the subject property had a market value of $1,723,280 (assessed value $348,370 residential & commercial) for tax years 2007 and 2008.The Complainant appealed to the State Tax Commission and proposed a value of $590,900 (assessed value $112,271).
A hearing was held on October 1, 2008, at the Callaway County Courthouse,Fulton,Missouri.Complainant was represented by counsel, Richard Dvorak.Respondent appeared in person and with counsel, Robert Sterner.At the Hearing, the Complainant proposed a value of $388,500 ($73,815 residential) and the Respondent proposed a value of $1,777,342 ($287,715 residential, $84,175 commercial).Complainant filed their brief on February 4, 2009.Respondent filed a reply on March 25, 2009.Complainant responded on April 30, 2009.
EXHIBITS
The following exhibits were submitted by the parties and accepted into the record:
Complainant’s Exhibits
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A |
Section 42 STC Worksheet |
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B |
Income and Expense Statements |
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C |
Rent Rolls |
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D |
LURA Agreement |
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E |
Direct Testimony of Robert Marx |
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F |
Direct Testimony of Kendra White |
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G |
Income Statement and Balance Sheet |
Complainant also offered Exhibit SE the Cost/Benefit Analysis of the Missouri Low-Income Housing Tax Credit Program.Respondent objected to the exhibit for lack of foundation.Objection was sustained.
Respondent’s Exhibits
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1 |
Restrictive Use Appraisal Report |
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2 |
Written Direct Testimony of Charles Trail |
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3 |
Worksheet |
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4 |
Complainant’s Response to Discovery |
FINDINGS OF FACT
1.Jurisdiction over this case is proper.Complainant timely filed its appeal from the decision of the Callaway County Board of Equalization.
2.The property is identified as tax ID number 13-4.0-18-0-00-000-104.01, more commonly known as Callaway Village Apartments, 604 Airway Drive, Fulton, Missouri.
3.The subject parcel is 3.4 acres with improvements including three, two-story low rise, and multi-family buildings with a gross building area of 47,710 square feet.There are a total of forty-eight units which are 955 square feet.The improvements include a community room, office, swimming pool and surface parking.
4.The apartment complex was built in 2001.
5.Forty percent (40%) of the apartments are restricted to tenants earning 50% or less of the area median income under the Low Income Housing Tax Credit (LIHTC) program administered by the Missouri Housing Development Commission and sixty percent (60%) of the apartments are restricted to tenants earning 60% or less of the area median income under the Low Income Housing Tax Credit (LIHTC) program administered by the Missouri Housing Development Commission.
6.The total construction cost of the development was $2,925,000 of which $585,000 was financed with a one-percent (1%) MHDC loan for a period of thirty (30) years.
7.In exchange for accepting restrictions on tenant eligibility, based on personal or family income levels, and restrictions on initial rent levels as well as future rental increases, developers are granted credits that can be applied toward federal and state income tax liabilities.Although these tax credits run with the land, our Supreme Court has ruled that said credits are not to be considered when determining market value of subsidized properties.
8.The property is rent restricted for a period of 25 years.
9.Calculating value based upon actual income, actual expenses, and actual interest and capitalization rates is the best way to recognize all benefits and risks associated with subsidized housing.[10]The Uniform Standards of Professional Appraisal Practice allows appraisers to deviate from traditional approaches to value when required by the jurisdiction.[11]
10.The parties agree that the effective gross income for the subject property was $191,145.The correct mortgage constant for a 1% loan for a 30 year term is .038597.
11.The parties disagree as to the treatment of the maintenance and repairs ($44,264) and reserves for replacement ($14,400).The parties disagree as to the loan to value ratio.The parties disagree as to the equity dividend rate.The parties disagree as to the classification of the property.
12.The correct value for the subject property is calculated as follows:
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$191,145 |
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$112,381 |
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$78,764 |
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Capitalization: Loan to Value x Loan Constant[d]
Equity to value x Equity Dividend Rate [e]
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.77%
5.6%
1.02% |
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Overall Cap Rate |
7.39% |
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Indicated Value |
$1,065,818 |
13.The true value in money for the subject property for tax years 2007 and 2008 is $1,065,818, assessed value $202,505.
CONCLUSIONS OF LAW
Jurisdiction
The Commission has jurisdiction to hear this appeal and correct any assessment which is shown to be unlawful, unfair, arbitrary or capricious.[12]
Complainant’s Burden of Proof
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 the tax day. [13]Substantial evidence can be defined as such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.[14] 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. [15]
Duty to Investigate
In order to investigate appeals filed with the Commission, the Hearing Officer has the duty to inquire of the owner of the property or of any other party to the appeal regarding any matter or issue relevant to the valuation, subclassification or assessment of the property. The Hearing Officer’s decision regarding the assessment or valuation of the property may be based solely upon her inquiry and any evidence presented by the parties, or based solely upon evidence presented by the parties. [16]
Weight to be Given Evidence
The Hearing Officer is not bound by any single formula, rule or method in determining true value in money, but is free to consider all pertinent facts and estimates and give them such weight as reasonably they may be deemed entitled. The relative weight to be accorded any relevant factor in a particular case is for the Hearing Officer to decide. [17]
The Hearing Officer as the trier of fact may consider the testimony of an expert witness and give it as much weight and credit as she may deem it entitled to when viewed in connection with all other circumstances. The Hearing Officer is not bound by the opinions of experts who testify on the issue of reasonable value, but may believe all or none of the expert’s testimony and accept it in part or reject it in part. [18]
Opinion Testimony by Experts
If specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert on that subject, by knowledge, skill, experience, training, or education, may testify thereto.
The facts or data upon which an expert bases an opinion or inference may be those perceived by or made known to the expert at or before the hearing and must be of a type reasonably relied upon by experts in the field in forming opinions or inferences upon the subject and must be otherwise reliable, the facts or data upon which the expert relies need not be admissible in evidence. [19]
Official Notice
Agencies shall take official notice of all matters of which the courts take judicial note. [20]
Courts will take judicial notice of their own records in the same cases.[21] In addition, courts may take judicial notice of records in earlier cases when justice requires[22] ‑ or when it is necessary for a full understanding of the instant appeal.[23]
Commission Determines Methodology
It is within the State Tax Commission’s discretion to determine what method or approach it shall use to determine the true value in money of property.[24] It is also within the State Tax Commission’s authority to ascertain the correct or modern means of determining value according to a particular method or approach that it adopts to ascertain valuation, and it is within the Commission’s discretion to determine what factors should be considered in fixing the “true value in money” for property under a valuation method or approach adopted for use in a particular case.[25] The relative weight to be accorded any relevant factor in a particular tax assessment case is for the State Tax Commission to determine.[26] State Tax Commission decisions must declare the propriety of and the proper elements to consider in adopting a valuation approach, and must provide a definite indication as to the weight accorded each approach or method, i.e., how the final decision is weighed between the various approaches, methods, elements and factors.[27] The determination of “true value in money” of any property is a factual issue for the State Tax Commission.[28]
Proper Methodology
It is within the authority and expertise of the Tax Commission to determine which valuation methodology best represents value in a given situation or for a particular category of properties.[29] After carefully considering the benefits and risks associated with subsidized housing, the State Tax Commission, in Maryville Properties[30], determined that calculating value based upon actual income, actual expenses, and actual interest and capitalization rates was the best way to recognize all benefits and risks associated with subsidized housing.
In Lake Ozark Village v. Whitworth[31], we stated:In this case, and all subsequent subsidized housing cases, the correct methodology for valuing subsidized housing projects is the methodology set out in Maryville Properties. That methodology is accurate because (1) rent restrictions are considered through the use of actual income rather than market income; (2) additional management requirements and expenses are accounted for through use of actual expenses which are in excess of market expenses; and (3) the actual loan‑to‑value ratio and the subsidized interest rate demonstrates and accounts for any and all risks involved in the property as well as the benefits flowing to the property.It is “economic reality.”
DISCUSSION
The risks and benefits associated with low-income housing must be measured in some fashion and, at this point in time, the best evidence of the risks and benefits of this type of endeavor is the willingness of the taxpayers to invest in same in exchange for the income and tax credits flowing from those investments.There has been only one sale of subsidized properties, if the subject property should sell, there is no evidence that the next purchaser would be able to obtain more favorable financing than the current owner presently enjoys.A substantial equity position would probably be required by MHDC.Our determination of value considers these factors and is consistent with the mandate of the Supreme Court in Missouri Baptist Children’s Home v. State Tax Commission[32], that we consider the “economic realities” of a particular piece of property when attempting to determine market value.
In Lake Ozark Village and Maryville Properties, we stated that the income approach should be developed using actual income and expenses realized by the subsidized property; it should use the loan-to-value ratio approved by the subsidizing agency based upon the subsidized mortgage rate; it should allow an appropriate equity dividend rate; and taxes should be included in the capitalization rate.
The parties disagreed as to the expenses to be included to determine the actual income, the loan-to-value ratio, the equity portion of the capitalization rate, and the classification of the property (which affects the calculation of the effective tax rate).
The Complainant included in their expenses the reserves for replacement and an expenditure using the funds from the reserves for replacement collected over the past years.A subsidized housing project is required to maintain a reserve account to replace short-lived building components.The function of the replacement allowance is to stabilize the income stream to avoid fluctuations in net income during years when capital replacements are required.The Complainant provides for $14,400 each year for reserves.In its 2006 expenses, the Complainant not only included in the expenses deducted from the income the $14,400 placed in the reserve account but also $44,000 expenditure from the reserve account for capital replacements.The Complainant should not have included both the expenditures for capital replacements and the reserves for replacement.
The parties disagreed as to the loan-to-value ratio.In Lake Ozark Village and Moberly Plaza[33], we stated that the mortgage equity ratio at the time of the signing of the mortgage is controlling. The cost of the project was $2,925,000.The original loan amount was $585,000 which is approximately 20% of the cost of the project.The Respondent used a ratio of 20%, the Complainant argued for a ratio of 16%.The Hearing Officer finds the correct loan to value ratio is 20%.
The parties disagreed as to the equity dividend rate.The Assessor’s expert, CharlesTrail, a State certified general appraiser, cited the Dictionary of Real Estate Appraisal, 4th Edition:
“Equity Dividend Rate as: Equity Capitalization Rate: an income rate that reflects the relationship between a single year’s pre-tax cash flow expectancy and the equity investment; used to convert pre-tax cash flow (equity dividend) into an equity value indication; also called the cash on cash rate, cash flow rate, or equity dividend rate.”
His rate considered the subject’s pre-tax cash flow as a percentage of the subject’s original equity amount.He believes that it is based upon the economic realities present in the property and considers the specific financing, net income, debt service, and owner’s cash outlay for equity.
The Assessor’s expert criticizes the Complainant’s equity rate selected stating that the Complainant’s rate would be more in line with an expected equity yield rate, also called the internal rate of return, which would be the total return on equity including the proceeds from the sale of the property at the end of the income projection period.
In Sixth Street Partners[34], we stated that “someone familiar with the process of determining capitalization rates must review the market and estimate the appropriate capitalization rate for the equity portion of this equation.”The Complainant’s expert complied with the prior decisions of the State Tax Commission when determining an equity dividend rate.
The Complainant’s expert testified that he researched the market capitalization rates used for similar apartment complexes and corroborated the findings with the results of published capitalization rate surveys of conventional apartment properties in Missouri.He adjusted the conventional market capitalization rate upward by 2% to recognize the risks associated with all low income properties, including this property.The lack of market sales, use restrictions, below market rents, small tenant pool and lack of future cash flows were considered when concluding the 9% equity dividend rate.As stated in Crystal City/Festus Partnership v. Jefferson County Assessor[35], “[i]t is not wholly clear that individuals who invest in subsidized housing projects are placing their funds at higher risk than other investments which would warrant a [higher] equity dividend rate.Likewise, it has not been established that this investment is reasonably safe warranting a [lower market] equity dividend rate.” [36]
The market rate concluded by the Complainant’s expert is an appropriate rate for this property.The Complainant’s expert adjusted that rate 2% upward for the risks involved in this type of property.The adjustment is not proper because the State Tax Commission’s formula considers the benefits and risks associated with subsidized housing: (1) rent restrictions are considered through the use of actual income rather than market income; (2) additional management requirements and expenses are accounted for through use of actual expenses which are in excess of market expenses; and (3) the actual loan‑to‑value ratio and the subsidized interest rate demonstrates and accounts for any and all risks involved in the property as well as the benefits flowing to the property.
ORDER
The value placed upon the subject property for tax years 2007 and 2008 is hereby SET ASIDE.The clerk is hereby ordered to place the correct value of $1,065,818 (assessed value $202.505 as residential) on the subject property for tax years 2007 and 2008.
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.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, MO65102-0146, and a copy of said application must be sent to each person at the address listed below in the certificate of service.
Failure to state specific facts or law upon which the appeal is based will result in summary denial.
If an application for reviewof a hearing officer decision is made to the Commission, any protested taxes presently in an escrow account in accordance with this appeal shall be held pending the final decision of the Commission. If no application for review is received by the Commission within thirty (30) days, this decision and order is deemed final and the Collector of Callaway County as well as the collectors of all affected political subdivisions therein, shall disburse the protested taxes presently in an escrow account in accord with the decision on the underlying assessment in this appeal. If any protested taxes have been disbursed pursuant to Section 139.031(8), RSMo, either party may apply to the circuit court having jurisdiction of the cause for disposition of the protested taxes held by the taxing authority.
Any Finding of Fact which is a Conclusion of Law or Decision shall be so deemed. Any Decision which is a Finding of Fact or Conclusion of Law shall be so deemed.
SO ORDERED May 6, 2009.
STATE TAX COMMISSION OFMISSOURI
Maureen Monaghan
Hearing Officer
[b] Utilities ($20,673) + Administrative ($65,848) + Insurance ($11,460) + Reserve for Replacement ($14,400)
[1] St. Louis County v. Security Bonhomme, Inc., 558 S.W.2d 655, 659 (Mo. banc 1977); St. Louis County v. STC, 515 S.W.2d 446, 450 (Mo. 1974); Chicago, Burlington & Quincy Railroad Company v. STC, 436 S.W.2d 650 (Mo. 1968).
[2] St. Louis County v. Boatmen’s Trust Co., 857 S.W.2d 453, 457 (Mo. App. E.D. 1993); Vincent by Vincent v. Johnson, 833 S.W.2d 859, 865 (Mo. 1992);Beardsley v. Beardsley, 819 S.W.2d 400, 403 (Mo. App. 1991); Curnow v. Sloan, 625 S.W.2d 605, 607 (Mo. banc 1981).
[3] Black v. Lombardi, 970 S.W.2d 378 (Mo. App. E.D. 1998); Lowe v. Lombardi, 957 S.W.2d 808 (Mo. App. W.D. 1997); Forms World, Inc. v. Labor and Industrial Relations Com’n, 935 S.W.2d 680 (Mo. App. W.D. 1996); Evangelical Retirement Homes v. STC, 669 S.W.2d 548 (Mo. 1984); Pulitzer Pub. Co. v. Labor and Indus. Relations Commission, 596 S.W.2d 413 (Mo. 1980); St. Louis County v. STC, 562 S.W.2d 334 (Mo. 1978); St. Louis County v. STC, 406 S.W.2d 644 (Mo. 1966).
[4] Hermel, Inc. v. STC, 564 S.W.2d 888 (Mo. 1978); Black v. Lombardi, 970 S.W.2d 378 (Mo. App. E.D. 1998); Holt v. Clarke, 965 S.W.2d 241 (Mo. App. W.D. 1998); Smith v. Morton, 890 S.W.2d 403 (Mo. App. E.D. 1995); Phelps v. Metropolitan St. Louis Sewer Dist., 598 S.W.2d 163 (Mo. App. E.D. 1980).
[5] Hermel, Inc. v. State Tax Commission, 564 S.W.2d 888, 896; Chicago, Burlington & Quincy Railroad Co. v. State Tax Commission, 436 S.W.2d 650, 657 (Mo. 1968), cert den. 393 U.S. 1092 (1969); St. Louis County v. Security Bonhomme, Inc., 558 S.W.2d 655, 659 (Mo. banc 1997).
[9] Hermel, Inc. v. STC, 564 S.W.2d 888 (Mo. 1978); Black v. Lombardi, 970 S.W.2d 378 (Mo. App. E.D. 1998); Holt v. Clarke, 965 S.W.2d 241 (Mo. App. W.D. 1998); Smith v. Morton, 890 S.W.2d 403 (Mo. App. E.D. 1995); Phelps v. Metropolitan St. Louis Sewer Dist., 598 S.W.2d 163 (Mo. App. E.D. 1980).
[17] St. Louis v. Security Bonhomme, Inc., 558 S.W.2d 655, 659 (Mo. banc 1977); St. Louis County v. STC, 515 S.W.2d 446, 450 (Mo. 1974); Chicago, Burlington & Quincy Railroad Company v. STC, 436 S.W.2d 650 (Mo. 1968).
[18] St. Louis County v. Boatmen’s Trust Co., 857 S.W.2d 453, 457 (Mo. App. E.D. 1993); Vincent by Vincent v. Johnson, 833 S.W.2d 859, 865 (Mo. 1992); Beardsley v. Beardsley, 819 S.W.2d 400, 403 (Mo. App. 1991); Curnow v. Sloan, 625 S.W.2d 605, 607 (Mo. banc 1981).
[19] Section 490.065, RSMo; Courtroom Handbook on Missouri Evidence, Wm. A. Schroeder, Sections 702‑705; pp. 325‑350; Wulfing v. Kansas City Southern Industries, Inc., 842 S.W.2d 133 (Mo. App. E.D. 1992).
[21] State ex rel. Horton v. Bourke, 129 S.W.2d 866, 869 (1939); Barth v. Kansas City Elevated Railway Company, 44 S.W. 788, 781 (1898).
[22] Burton v. Moulder, 245 S.W.2d 844, 846 (Mo. 1952); Knorp v. Thompson, 175 S.W.2d 889, 894, transferred 167 S.W.2d 205 (1943); Bushman v. Barlow, 15 S.W.2d 329, 332 (Mo. banc 1929)
[23] State ex rel. St. Louis Public Service Company v. Public Service Commission, 291 S.W.2d 95, 97 (Mo. banc 1956).