State Tax Commission of Missouri
CARAFIOL’S PROPERTIES CO.,)
v. ) Appeal Nos.09-10176 – 09-10178
JAKE ZIMMERMAN, ASSESSOR,)
ST. LOUIS COUNTY, MISSOURI,)
MODIFYING HEARING OFFICER DECISION
UPON APPLICATION FOR REVIEW
On January 26, 2012, Senior Hearing Officer W. B. Tichenor entered his Decision and Order (Decision) setting aside the assessments made by the St. Louis County Board of Equalization and setting assessed values for 2009 and 2010.
Respondent filed his Application for Review of the Decision.Complainant filed its Brief in Opposition.Respondent filed his Reply.
CONCLUSIONS OF LAW
Standard Upon Review
A party subject to a Decision and Order of a hearing officer with the State Tax Commission may file an application requesting the case be reviewed by the Commission.The Commission may then summarily allow or deny their request.The Commission may affirm, modify, reverse or set aside the decision.The Commission may take any additional evidence and conduct further hearings.
Respondent’s Claims of Error
Respondent puts forth the following alleged errors in the Decision.
1. The Hearing Officer erred in not considering a market vacancy rate survey that was produced by Respondent’s appraiser.
2. The Hearing Officer erred in mixing features of direct capitalization and discounted cash flow.
3. The Hearing Officer erred in his determination as to the matter of additional income.
4. The Hearing Officer erred in the adoption of the 14.06 capitalization rate utilized by Complainant’s appraiser.
Discussion and Rulings
The Commission will address each of the points raised by Respondent.
Market Vacancy Rate Survey
The market vacancy rate survey developed by Respondent’s appraiser was never offered into evidence and accordingly the Hearing Officer did not receive it into evidence.Counsel for Respondent included a copy of it in his Post-Hearing Brief.The document was not produced on the record.The document was not placed in the Commission file.It does not exist in the Commission file as a separate document.A document represented by Mr. Winkler’s Affidavit as the market vacancy rate survey is an attachment to the Affidavit in the Commission file.
Respondent’s suggestion that the Commission should take official notice of a document never offered or received into evidence is misguided and not supported by the case law on taking of official notice.Since the market vacancy rate survey never became a part of the evidentiary record in this appeal, the Commission cannot take official notice of it.The fact that Counsel for Respondent included it as part of a Post-Hearing Brief does not elevate the document to the status of being part of the evidentiary record.
The Decision addresses at length the matter of the subject’s vacancy.The conclusion of the Hearing Officer to utilize the subject property’s historic vacancy rate, as relied upon by Complainant’s appraiser, is well supported by the evidence in this appeal.There was competent and substantial evidence to support this conclusion of the Hearing Officer.The Hearing Officer did not err in his determination on this point.
Post-Tax Lien Lease
Respondent takes exception to the Hearing Officer’s determination that the rental of a portion of the subject seventeen months after the valuation date could not be considered in concluding value as of January 1, 2009.The Hearing Officer in FN 39 provides the basis for his determination.That basis is “There was no evidence that as of January 1, 2009 a prospective purchaser would have been able to know that approximately 17 months later a tenant would be located for most of the vacant space.”Respondent does not challenge the basis for the conclusion.Respondent points to nothing in the evidentiary record establishing that prior to January 1, 2009, any prospective purchaser could have had any reasonable expectation of the transaction that took place nearly a year and a half after January 1, 2009.There is none.Accordingly, the Hearing Officer did not err in his determination that the evidence as to the post-tax lien lease could not be considered in concluding value as of January 1, 2009.
Mixing Direct Capitalization and Discounted Cash Flow
A review of the Decision fails to establish that the Hearing Officer mixed the direct capitalization and discounted cash flow methodologies.Respondent’s claim is that the utilization of the subject’s historic 40% vacancy is a mixing of the actual vacancy with a direct capitalization method.The only basis for Respondent’s claim is his citation to page 532 of The Appraisal of Real Estate, Appraisal Institute, Eleventh Edition – “When a series of periodic incomes varies in an irregular pattern, the basic DCF formula is used in its analysis and valuation.”The cited statement has nothing to do with vacancy rate.The Hearing Officer did not rely upon a “series of periodic incomes” which varied in “an irregular pattern.”
The point is not well taking.As previously addressed, the Hearing Officer’s conclusion to rely upon the 40% vacancy is supported by the evidence.To do so did not constitute a mixing of the discounted cash flow methodology with the direct capitalization methodology.This claim provides no basis upon which the Decision should be overturned or modified.
Respondent challenges the Hearing Officer’s conclusion that there was “not a significant variance in the point” of other income between the two appraisers.Complainant’s appraiser added other income, in the amount of $207,591, after applying his 40% vacancy factor to Total Rents.Respondent’s appraiser added other income of $361,678 before applying his 20% vacancy factor.However, the Complainant’s Account Compilation Report for 2009 showed additional income of only $341,782.Accordingly, Respondent’s appraiser overstated the other income by approximately $20,000.Furthermore, Respondent’s appraiser included $144,376 for real estate tax reimbursements in his $361,678 amount.However, there was no corresponding deduction as an expense for this amount.
Since real estate taxes were to be accounted for by loading the capitalization rate, either the real estate tax reimbursement should not have been included as other income, or, if so included, that amount would be also included in expenses.The other income for real estate tax reimbursement was a wash.When the amounts from the Account’s Compilation Report for insurance reimbursements, management fees and CAM collected are totaled, the result is $210,841.There is not a significant variance between this amount and the amount used as other income by Complainant’s appraiser.
The Hearing Officer’s error on this point was not his conclusion of no “significant variance.”The error was in not addressing in detail the matter as has been set forth above.This does not constitute a basis for overturning or modifying the decision.
Respondent challenges the Hearing Officer’s conclusion to rely on the capitalization rate presented by Complainant’s appraiser.In the Complainant’s brief, page 8, he states that “setting aside all other deficiencies with the analysis of the Assessor’s appraiser, simply adjusting his vacancy allowance to reflect reality brings his valuation in line with the Complainant’s evidence of value.Using the Assessor’s appraiser’s reconstructed statement as is, but applying a 40% vacancy loss, results in a reconstructed statement as follows:
POTENTIAL GROSS INCOME$2,004,181
VACANCY AND CREDIT LOSS($801,672)
EFFECTIVE GROSS INCOME$1,202,508
NET OPERATING INCOME$600,966”
CAPITALIZATION RATEx .108
Summary and Conclusion
A review of the record in the present appeal provides support for the determination of value using the Assessor’s appraiser’s reconstructed statement set forth by the Complainant with the adjustment as to the vacancy rate.
The Commission, upon review of the record and Decision in this appeal, modifies the decision of the hearing officer and finds a market value of $5,564,500, a commercial assessed value of $1,780,640.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 ofSt. Louis 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 December 2, 2013.
STATE TAX COMMISSION OF MISSOURI
Bruce E. Davis, Chairman
Randy B. Holman, Commissioner
Victor Callahan, Commissioner
DECISION AND ORDER
Decisions of the St. Louis County Board of Equalization reducing the assessments made by the Assessor are SET ASIDE.
The true value in money for the subject property in Appeal No. 09-10176 for tax years 2009 and 2010 is set at $2,300,000, a commercial assessed value of $736,000.
The true value in money for the subject property in Appeal No. 09-10177 for tax years 2009 and 2010 is set at $2,450,000, a commercial assessed value of $784,000.
The true value in money for the subject property in Appeal No. 09-10178 for tax years 2009 and 2010 is set at $250,000, a commercial assessed value of $80,000.
Complainant appeared by Counsel, William H. Clendenin and Paul J. Puricelli, Stone, Lexton & Gershman, St. Louis.Respondent appeared by Associate County Counselor, Edward W. Corrigan.
Case heard and decided by Senior Hearing Officer W. B. Tichenor.
Complainant appeals, on the ground of overvaluation and discrimination, the decision of the St. Louis County Board of Equalization, which reduced the valuation of the subject property.The Commission takes this appeal to determine the true value in money for the subject property on January 1, 2009.The Hearing Officer, having considered all of the competent evidence upon the whole record, enters the following Decision and Order.
FINDINGS OF FACT
1.Jurisdiction.Jurisdiction over this appeal is proper.Complainant timely appealed to the State Tax Commission from the decision of the St. Louis County Board of Equalization.A hearing was conducted on April 26, 2011, at the St. Louis County Government Center, Clayton, Missouri.Transcript received by the Commission on June 16, 2011.Complainant’s Post Trial Brief received by the Commission on September, 14, 2011.Respondent’s Reply Brief received by the Commission on September 15, 2011.Complainant’s Reply Brief received by the Commission on October 17, 2011.
2.Discrimination Claim Abandoned.Complainant marked the ground of discrimination on the Complaints for Review of Assessment.No evidence was prefiled which would sustain a finding that the Board had an intentional plan to assess the subject properties at a ratio greater than 32 percent of the true value in money for each property, or at a ratio greater than the average 2009 commercial assessment ratio for St. Louis County.Therefore, the claim of discrimination was deemed abandoned at hearing.
3.Assessment.The Assessor valued the subject properties for a combined appraised value of $14,968,600, a commercial assessment of $4,789,950.The Board reduced the values to a total appraised value of $11,975,900, a commercial assessment of $3,832,290.The appraised and assessed values placed on each property by the Board and the percentages of assessed value for each property to the combined assessed value for the total properties are given in the following chart.
4.Subject Property.The subject property is located at 14007 – 14141 Manchester Road, St. Louis, Missouri. It is otherwise known as the Center at Manchester and Weidman.
 It is operated as a single economic unit and was so valued by both appraisers.The property is identified by parcel numbers 22Q320218, 22Q310042 and 22Q320117 respectively.The property consists of 26.36 acres, improved by an 187,800 square foot retail shopping center constructed between 1979 and 1982.A more detailed description of the subject’s improvements can be found in each of the party’s appraisals.
5.Complainant’s Evidence.The following exhibits were received into evidence on behalf of Complainant:
Written Direct Testimony – David J. Sebelius
Mr. Sebelius and Mr. Carafiol both testified at hearing.
There was no evidence of new construction and improvement from January 1, 2009, to January 1, 2010, therefore the assessed value for 2009 remains the assessed value for 2010.
Complainant’s evidence was substantial and persuasive to rebut the presumption of correct assessment by the Board and establish the true value in money as of January 1, 2009, to be $5,000,000 for the property under appeal.See, Hearing Officer Concludes Value, infra.
6.Respondent’s Evidence.The following exhibits were received into evidence on behalf of Respondent:
Mr. Winkler testified at hearing.
7.Allocation of Value.The concluded value for the subject property is $5,000,000.See, Hearing Officer Concludes Value, infra.The value is allocated among the three respective properties based on the percentages set out in Finding of Fact 3, supra.Accordingly the allocated true values in money and assessed values for the parcels are as set forth in the following chart:
True Value in Money
CONCLUSIONS OF LAW AND DECISION
The Commission has jurisdiction to hear this appeal and correct any assessment which is shown to be unlawful, unfair, arbitrary or capricious.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.
Basis of Assessment
The Constitution mandates that real property and tangible personal property be assessed at its value or such percentage of its value as may be fixed by law for each class and for each subclass.The constitutional mandate is to find the true value in money for the property under appeal. By statute real and tangible personal property is assessed at set percentages of true value in money.In an overvaluation appeal, true value in money for the property being appealed must be determined based upon the evidence on the record that is probative on the issue of the fair market value of the property under appeal.
Presumption In Appeals
There is a presumption of validity, good faith and correctness of assessment by the County Board of Equalization.This presumption is a rebuttable rather than a conclusive presumption.It places the burden of going forward with some substantial evidence on the taxpayer – Complainant.When some substantial evidence is produced by the Complainant, “however slight,” the presumption disappears and the Hearing Officer, as trier of facts, receives the issue free of the presumption.The presumption of correct assessment is rebutted when the taxpayer, or the Respondent when advocating a value different than that set by the Board, presents substantial and persuasive evidence to establish that the Board’s valuation is erroneous and what the fair market value should have been placed on the property.Upon presentation of the Complainant’s evidence the presumption in this appeal disappeared.The case is decided free of the presumption.
Standard for Valuation
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 bought by one who is willing or desirous to purchase but who is not compelled to do so.True value in money is defined in terms of value in exchange and not value in use.It is the fair market value of the subject property on the valuation date.Market value is the most probable price in terms of money which a property should bring in competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeable and assuming the price is not affected by undue stimulus.
Implicit in this definition are the consummation of a sale as of a specific date and the passing of title from seller to buyer under conditions whereby:
1.Buyer and seller are typically motivated.
2.Both parties are well informed and well advised, and both acting in what they consider their own best interests.
3.A reasonable time is allowed for exposure in the open market.
4.Payment is made in cash or its equivalent.
5.Financing, if any, is on terms generally available in the Community at the specified date and typical for the property type in its locale.
6.The price represents a normal consideration for the property sold unaffected by special financing amounts and/or terms, services, fees, costs, or credits incurred in the transaction.
Both appraisers concluded value under the Standard for Valuation.
Methods of Valuation
Proper methods of valuation and assessment of property are delegated to the Commission.It is within the purview of the Hearing Officer to determine the method of valuation to be adopted in a given case.Missouri courts have approved the comparable sales or market approach, the cost approach and the income approach as recognized methods of arriving at fair market value. Both appraisers developed the sales comparison and income approaches to arrive at a conclusion of fair market value.Complainant’s appraiser placed equal weight on the sales comparison and income approaches.Respondent’s appraiser concluded value based on the income approach.
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 need not be admissible in evidence.
The case presented the work product and testimony of two experts in the field of real estate appraisal, both of whom have appeared as expert witness before the Commission in prior cases.The data presented in each appraisal report and testified to were of the type reasonably relied upon by experts in the field of commercial real estate appraisal, and were deemed to be otherwise reliable.
Hearing Officer Concludes Value
Burden of Proof
Complainant bears the burden to 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, 2009.There is no presumption that the taxpayer’s opinion is correct. The taxpayer is the moving party seeking affirmative relief.Therefore, the Complainant bears the burden of proving the vital elements of the case, i.e., the assessment was “unlawful, unfair, improper, arbitrary or capricious.”An assessment which values the property being appealed at a value that is greater than what a willing buyer and willing seller would have agreed to as the purchase price on January 1, 2009 is an unlawful, unfair and improper assessment.
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.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.As will be hereafter developed, the opinion of value presented on behalf of Complainant met the required standard to carry the burden of proof.
Subject’s Negative Factors
The property under appeal is significantly influenced by a variety of negative factors.Any well informed and well advised investor acting in what would be considered to be the investor’s own best interests would consider and take into account these negative factors in determining the amount to be paid for purchase of the subject.These conditions would clearly result in a lower purchase price than would be the case if the conditions did not exist.
The following factors were detailed in the testimony of the property manager and Complainant’s appraiser, as well as addressed in the Sebelius appraisal.
Visibility and Access. The subject’s visibility from Manchester Road is significantly impacted from the main shopping center building being set back from the street a considerable distance due to the location of a detention basin on the southern edge of the property.There is no signalized entry to the property.Left turns into the subject are difficult during times of high traffic.
Excess land.The excess land in the back portion of the subject has a substantial elevation change.Any type of development on this land would be difficult and require substantial excavation and extensive retaining wall work.As of January 2009 this area was not ready for any type of immediate development that would turn it into an income producing area.
Parking Restrictions.The parking ratio for the subject is 5.5 spaces per 1,000 square feet of retail space.There is a variance for the two largest spaces in the center for only 3 spaces per 1, 000 square feet.This is based on the two largest spaces being operated as retail furniture stores.If the spaces are leased to tenants that are not retail furniture stores, then the 5.5 space requirement would apply.This would result in a reconfiguration of the parking lot at possibly a very high cost due to relocation of light standards, striping and other parking lot features.
Rental Space.The rental units are small when compared to newer commercial strip centers.The larger units are bi-level space.Prospective anchor tenants that might desire the large space do not want bi-level space.The property has had significant difficulty attracting national credit tenants.Most tenants are small, local operations.Such tenants have more difficulty keeping up with rent payments, and do not have reserves to keep operating when there are downturns in sales.The subject’s vacancy for the seven to eight years prior to 2009 had run at about 40%, as of January 2009 the subject suffered from a 39% vacancy rate. 
Maintenance and Repairs.There is significant deferred maintenance associated with the subject.The roof is failing in more than one area.It has active leaks and is in need of complete replacement.The HVAC units are 20 years old, past their useful life.The parking lot is in need of substantial repairs.
Functional Obsolescence.The layout and orientation, although well accepted in the market at the time of its construction (1979 & 1982), does not fit the needs of many prospective tenants in a 2009 market.The majority of newly developed shopping centers are oriented towards new big box tenants with space developed with movable partitions.Retailers will pay higher rental rates for more flexible types of spaces which accommodate them.The subject does not fit this type of retail model.In particular, the bi-level space constitutes a significant amount of functionally obsolete area.The market substantially discounts bi-level spaces because it is more difficult to service and is hard to utilize in an effective manner.Multi-level space has minimal marketability.Retailers will not lease or give any levels of rent for the upper floors.There is no way to divide the bi-level spaces in order to generate rent.
Summary & Conclusion
These influences must be considered and accounted for in order to arrive at a valid conclusion of value.The impact of these factors has manifested itself in the depressed occupancy of the subject, as well as the rent structure necessary to attract and keep its limited tenants.Mr. Winkler’s appraisal failed to address any of these critical elements.This omission to account for the negative influences which burden the property being appraised resulted in a conclusion of value, by Respondent’s appraiser that is artificially in excess of the actual operation of the subject.Such a determination of value ignores the manner in which an informed investor-purchaser would consider the property.
Sales Comparison Approaches
Both appraisers developed a sales comparison or market approach to value the subject.The concluded values spanned a valuation gap of $7,855,000.Mr. Sebelius concluded a value under his market analysis of $5,821,800, which he rounded to $5,825,000.Mr. Winkler’s concluded value was $13,680,000.
The Sebelius market approach relied upon sales of three similar properties.Mr. Winkler utilized five sale properties, one of which was a sale also used by Mr. Sebelius.Each appraiser made various adjustments they deemed appropriate.The adjustments addressed normal items related to time of sale, and physical characteristics of each sale compared to the subject.
Sales Adjustment Grids
Both appraisers provided the standard Sales Adjustment Grid.It is expected that this will be provided in a properly prepared appraisal presented before the Commission.The deficiency which occurs in the Hearing Officer’s opinion in sales comparison adjustments with commercial properties like the subject and, somewhat with commercial properties in general, is the basis for any given adjustment.
For example, in the present appraisal problem, the appraisers were presented with a subject improvement that has three specific areas of significant deferred maintenance.See, Subject’s Negative Factors – Maintenance and Repairs, supra.In comparing to any sale property, special attention would need to be paid to this critical element when adjusting for condition.While Mr. Sebelius adjusted his comparables for Condition/Age at -20% for two comps and -30% for one comp, there was no correlation of these adjustments to the roof, HVCA and parking lot deferred maintenance issues present with the subject.It was simply concluded that the sales were all in superior condition to the subject.However, the Hearing Officer is left to his own resources to ascertain exactly how the percentages of adjustment correspond to the potential financial costs of correcting the deferred maintenance issues.
Mr. Winkler likewise adjusted three of his sales for their superior condition to the subject.Two were adjusted at a -10% and one was adjusted at a -20%.However, two properties were not adjusted for Age/Condition at all.The only logical conclusion that the Hearing Officer can make is that these two properties were suffering from similar deferred maintenance issues when they sold as the subject was on January 1, 2009.However, there is no narrative in the appraisal that would confirm or rebut this.
The narrative provided by each appraiser on their age/condition adjustment is quite limited and generally uninformative.The Sebelius’ narrative explanation for his adjustment consists of the following three sentences:
“This is the area typically where the higher level of adjustment activity occurs.All sales were adjusted.Adjustments applied were -20% for Sales # 1 and # 3.Sale #2 was adjusted -30% for superior condition.”
The Hearing Officer from his experience in hearing cases and reading hundreds of appraisals over the past twenty years would not take issue with the opening sentence.That is what has been observed in most other appeals where a sales comparison is included in an appraisal.As to the second and third sentences, the Hearing Officer concluded that when he viewed the sales adjustment grid.It speaks for itself that each sale was adjusted for this factor and the percentage of negative adjustment (indicating a superior condition for the sale comp) for each property.In other words, the appraiser has not provided any information as to what was the basis or justification for the adjustments, only a recitation of what the adjustments were.There is nothing that identifies how any market data or analysis, or other relevant information was researched and brought to bear to conclude the adjustments made.It appears that Mr. Sebelius’ adjustments like Mr. Winkler’s, as will be addressed below, were qualitative as opposed to quantitative.
Mr. Winkler provided no specific narrative as to the basis for his age/condition adjustments.His commentary as to adjustments consisted of the following two general sentences:
“Adjustments to the comparables have been applied to the indicate units of comparison, which in this instance is price per square foot.While these adjustments are based on recognized appraisal and economic theory, they may only reflect a qualitative adjustment and have not necessarily been directly measured from the marketplace, which reflects quantitative adjustments.”
The first sentence only restates what one can readily deduce from reading the sales grid.Mr. Winkler made adjustments to the unit price of price per square foot (Mr. Sebelius did the same).The second sentence asserts that the adjustments, which must include the age/condition adjustment, were “based on recognized appraisal and economic theory.”The Hearing Officer is at a loss to understand or recognize either the appraisal or economic theory which warranted the percentage adjustments made to the three properties and the absence of any adjustment to the other two sales.
The remainder of the second sentence which postulates that the appraiser’s adjustments “may only reflect a qualitative adjustment” as opposed to a quantitative adjustment measured from market activity provides no useable information to establish the basis for the individual adjustments.It can only be concluded that the appraiser “may” have used a qualitative analysis to make his age/condition adjustment, and did not make a quantitative analysis from market activity.The Hearing Officer concludes there was insufficient market data for adjustments to be based upon a quantitative analysis, since only where then is insufficient market data to employ quantitative techniques should an appraiser resort to a qualitative analysis.
However, there is nothing to be derived from either the Sebelius or the Winkler appraisals which provides any explanation of the analytical process and logic applied using qualitative analysis techniques.The Hearing Officer certainly understands that an appraiser may not always have access to sufficient market data to underwrite certain adjustments in the sales comparison approach and accordingly feels a resort to a “qualitative” adjustment is required.In those instances, the appraiser will be best served by providing sufficient narrative explanation to defend their position on the adjustment, instead of simply stating for the Hearing Officer the obvious.
Economic Factors of Difference
However, neither appraiser addressed what if any variance existed between each sale property and the subject relative to the different economic factors.
The Sebelius appraisal provided effective gross and net operating income for each of his sales.When this information is converted to a per square foot unit of comparison to the subject, it is clear each of the sale properties were significantly superior to the subject.The Winkler approach provided no information regarding the effective gross or net operating income for any of his comparables.Therefore, it is impossible to ascertain the economic position in which these sales actually stood relative to the subject.
Information that demonstrates the income stream for sale comparable properties is of significant importance in assessing the relative comparability of each sale property to the subject.Simply comparing physical characteristics and not analyzing the fiscal factors fails to account for differences that may exist in rental, vacancy and expense rates.It is not really the bricks and mortar that an investor is purchasing with properties like the subject.They are purchasing an income stream.Therefore, once an appraiser has selected the sales deemed to be most similar to the subject based on sale date, location, size (land and improvements), condition, age, and other relevant factors of comparability, it is prudent, when preparing evidence to be presented before the Commission in an appeal to provide as much data addressing the factors that make up the income stream as possible for each sale property.It is understood that appraisers are not always able to discovery such financial information in a cursory review of standard sales information.It may often be necessary to do additional investigation with several sources to ascertain the type of critical financial information that is needed.
In the final conclusion, Mr. Sebelius gave equal weight to his market methodology along with his income analysis.The Hearing Officer is not as enamored with the Sebelius sales comparison approach as is the appraiser, and is more persuaded by the income approaches presented in the record.Although as between the Sebelius approach and the Winkler approach, if the Hearing Officer had to select between the two sales methodologies, the Sebelius market analysis would be considered the stronger.
Mr. Winkler actually gave no weight to his sales comparison approach, since his final conclusion of value was the same as the value concluded under his income approach.The Hearing Officer concurs that the sales approach tendered on behalf of Respondent should not be given any weight in determining value, in light of the income data on the subject.
The subject is an income producing property and any prospective purchaser would look at it in this fashion in the marketplace.The income approach is what typically is used to value a property such as the subject.It is this approach upon which value is to be concluded.
As with the sales comparison approach, both appraisers concluded a value under the income approach to value.Mr. Sebelius determined a value per the income approach of $4,125,000.Mr. Winkler’s income approach resulted in a value of $9,320,000.The Hearing Officer is left with a range of $5,195,000 within which value can be concluded.
Potential Gross Income for Subject
The two appraisals are not as far apart as the final conclusions of value when addressing the income for the subject.Both appraisers utilized the subject’s actual rental income for the occupied space.Mr. Sebelius valued the vacant ground level space at $15 per square foot, while Mr. Winkler valued that space at $12 per square foot.The Bi-Level space was valued at $3 per square foot by both appraisers.There were some slight variances relative to the amount of square footage of rental space used by each appraiser.However, the concluded total rental in the Sebelius appraisal was $1,715,222.The Winkler appraisal’s total rental income calculated to $1,642,503.Accordingly, the appraisals are only $72,710 apart on the potential gross income of the subject.
The appropriate vacancy factor is one of the critical differences between the two conclusions of value under the income approach.The variance on this point is most significant factor contributing to the difference in the final opinions of value.Mr. Sebelius used a 40% vacancy factor.Mr. Winkler used a 20% vacancy factor.
As discussed above under Subject’s Negative Factors there are significant elements related to the operation of the subject shopping center.Those elements have resulted in a vacancy rate that has been close to 40% for several years leading up to the current valuation date.No well informed investor could possibly, in the investor’s own best interest, ignore the actual performance history of the subject.The hypothetical investor-purchaser on January 1, 2009, for the property under appeal would be purchasing a property with an income stream only operating at 60% of capacity.Mr. Sebelius properly considered and accounted for the subject’s negative influences and utilize the vacancy rate appropriate for valuing the subject as of January 1, 2009.
How Mr. Winkler arrived at a vacancy factor of 20% was not established in the record by Mr. Winkler’s appraisal or his written direct testimony.The appraisal reports a 20% vacancy on page 36 where the appraiser sets out his calculations to arrive at Net Operating Income.However, there was no supporting data presented to establish how this particular rate was derived.In his written direct testimony, Mr. Winkler testified the vacancy rate of 20% was to stabilize the subject’s income stream.He went on to assert that the vacancy rate of 39% was not expected to continue in perpetuity.Only under cross-examination did the appraiser indicate that he had performed some type of study as a basis for a 20% vacancy rate.
Counsel for Respondent in Respondent’s Brief sets out in the form of a chart on page 3 what purports to be the “vacancy rate survey” which formed the basis of Mr. Winkler’s 20% vacancy rate in his appraisal.Counsel for Complainant’s objection in his Reply Brief on this point is well taken.The survey inserted in Respondent’s Brief is not part of the evidentiary record.It was not offered into evidence.It cannot nearly five months after the close of the hearing be received into evidence.The Winkler vacancy chart has no probative weight, since it is not evidence in the appeal.
When an appraisal problem involves a rental property, then an appraiser has ready at hand the vacancy for the property.If the appraisal problem involved an owner-occupied property that could be marketed for an investment purchaser, then determining what the market vacancy is for the subject’s market area is certainly appropriate.However, the actual vacancy rate of the property being appraised is always part of the market vacancy.It may be anywhere in the range of market vacancy, but a subject’s vacancy always is part of the market.Artificially applying a vacancy factor that does not represent the actual market condition that would have existed for the subject property on January 1, 2009, distorts what the hypothetical purchaser would have considered in arriving at the purchase price.Accordingly, it distorts the income stream of the property.
In the present case, if the subject’s vacancy had only been between 5 or 10 percent, how could one possibly in any rational manner use a 20% vacancy, just because certain properties were operating at that rate of occupancy?The answer is simply one wouldn’t apply the so-called “market vacancy” of 20% to a property that was operating at 5% – 10% and its history showed it had been doing so for the past five or more years.In like manner, there is no justification to arbitrarily cut the actual vacancy by 50%, when there was no evidence upon which any well-informed investor purchaser could conclude that the subject’s vacancy would fall by such drastic amount.
The appropriate vacancy rate established upon this record is 40%.It defies logic, not to mention common sense, to conclude that after five or more years of vacancy at approximately 40%, the investor-purchaser would conclude that his purchase price will be based upon only a 20% vacancy on January 1, 2009.No doubt the purchaser intends and will seek to increase the occupancy of the subject, however, there is no evidence that as of January 1, 2009, any prospective purchaser would have been in possession of any information from which he could conclude that the vacancy rate would be significantly reduced at anytime in the near future.
The next step in determining the Effective Gross Income is to address the matter of any additional income for the subject.The subject operates on a triple net basis as is common in the market for these types of investment properties.Both appraisers added additional income from CAM (Common Area Maintenance) which is collected to offset expenses for items such a insurance, taxes, common area maintenance and other expenses.There was not a significant variance on the point between Mr. Sebelius and Mr. Winkler.
Effective Gross Income
The effective gross income concluded by Complainant’s appraiser was $1,236,724.Respondent’s appraiser arrived at an effective gross income of $1,603,345.The difference was essentially because Mr. Winkler ignored the vacancy history of the subject and relied on a vacancy factor not based upon the actual performance of the property.The concluded effective gross income under the Sebelius methodology is appropriate for a conclusion of value under the income approach.
In general, Mr. Sebelius utilized the actual 2008 expenses for the property.The management fee and reserves for replacement which were included in the expense analysis by Complainant’s appraiser were appropriate.Mr. Winkler also generally utilized the actual operating expenses.He did, however, reduce and even eliminate certain actual expenses without explanation, other than “expenses provided by the property owner have been adjusted to reflect industry norms.”The apparent source for Mr. Winkler’s reduction and elimination of allowable actual expenses was an IREM report.
The problem on this point is that the IREM report, apparently relied upon for this critical reduction and elimination of certain expenses, is not to be found in Respondent’s appraisal.The Hearing Officer has no way in which the IREM report can be examined to ascertain critical factors concerning what properties were used in the study and how similar or dissimilar where the properties in the report to the subject.Significant questions arise any time an appraiser relies upon some report to conclude income, vacancy or expenses.How many total properties were covered in the IREM report?What was the gross income for each property?What was the range of vacancy and the vacancy for each property?What was the range of expenses converted to a common unit of measurement, i.e. rentable square footage?What was the per rentable square foot of expenses for each property?Without this information, there is no way that an appraiser, let alone, the Hearing Officer can conclude that the information contained in an IREM report has any relevance to the property under appeal.
If all or a majority of the properties reported on were significantly larger or smaller than the subject, or had vastly different gross income or vacancy rates, then any expense data from the report has little validity to form the basis for the expenses to be utilized in the income approach.Here again, as with the subject’s gross income and vacancy, the prospective investor-purchaser is going to consider the subject’s actual expenses.The reduction or elimination of over $130,000 in actual expenses for the subject was not warranted.The Winkler report gave no explanation or comment to justify the reduction or elimination.The appraiser’s claim that market data was used to evaluate the reasonableness of expenses is lacking, in light of no market data being provided in the appraisal for the Hearing Officer to review to ascertain its possible probative weight. Accordingly, the Sebelius report provides persuasive evidence on the issue of expenses to be used to calculate value under the income approach.
Net Operating Income
From the foregoing, the Hearing Officer concludes that the net operating income (NOI) determined by the Sebelius analysis is appropriate in the present case.Mr. Sebelius appropriately utilized the subject’s income, vacancy and expenses to arrive at his NOI.There was no reliance on asserted industry averages or norms on unidentified properties which may or may not have had sufficient similarities to the subject to be considered as comparable for development of the income approach.
The concluded income by Mr. Winkler of $1,001,803 is primarily a result of his failure to recognize and employ the subject’s actual vacancy rate.As Counsel for Complainant very aptly demonstrated in Complainant’s Brief, if the Winkler income approach is simply correct only by the vacancy factor, leaving the income and expense items as concluded by Mr. Winkler, the NOI calculates to $600,966, compared with the Sebelius NOI of $579,471, only a 3.6% variance.
Capitalizing this amount by Mr. Winkler’s cap rate of 10.8% the indicated value of the property would be $5,564,500, not the $9,319,964 concluded by the Winkler income approach.
Both appraisers developed a capitalization rate through the band of investment technique.Mr. Winkler concluded a 10.749% cap rate with the effective tax rate added under his band of investment.
Mr. Sebelius developed a loaded cap rate of 12.72% under his band of investment.He also performed a debt coverage ratio analysis which resulted in a concluded loaded cap rate of 12.24%.The appraiser also concluded a loaded cap rate from comparable sales of 14.06%.It was this rate which he applied to his NOI to arrive at the indicated value of $4,125,000 under the income approach.
The critical weakness in the cap rate concluded by Mr. Winkler is that he based it upon averages for institutional grade properties.However, the appraiser admitted that the subject was not an institutional grade property.He further conceded that one should look at non-institutional over all cap rates in relation to valuing the subject.
As previously addressed the subject suffers from significant negative influences which any knowledgeable investor would account for in arriving at a purchase price.See, Subject’s Negative Factors, supra.The overall cap rate to be used to properly account for the risk involved in the purchase of the property under appeal must be sufficient to account for the additional risk imposed by the subject’s negative factors.Any potential investor would evaluate the potential risk for the subject by giving consideration to negative factors.The investor would require a higher rate to invest in the property than was reflected by Mr. Winkler’s concluded cap rate.
The 8% rate was not reflective of the impact of the negative factors on the subject’s value.The rate concluded by Mr. Sebelius was appropriate for concluding value under the income approach.
Complainant’s appraisal evidence was substantial and persuasive to support an indicated value of $5,000,000 as concluded by Mr. Sebelius.For the reasons addressed in detail above, the Hearing Officer found no probative value in the appraisal or conclusion of value of Mr. Winkler.As was demonstrated above, the simple adjustment in the vacancy rate to recognize the subject’s historical vacancy in the Winkler income approach rebutted the conclusion of value derived by Respondent’s appraiser.The Hearing Officer sees no need to meld the Winkler income value using the 40% vacancy and the Sebelius income value, since to do so results essentially in the $5,000,000 value concluded by Complainant’s appraiser.
Complainant met its burden of proof to present substantial and persuasive evidence which rebutted the presumption of correct assessment by the Board and establish the true value in money for the subject to be $5,000,000.
The Hearing Officer’s comments in this Decision, especially under the Sales Comparison Approaches section are intended to be constructive not only for the two present appraisers, but hopefully, other appraisers (and attorneys) who regularly or irregularly may come before the Commission.This appeal presented an opportunity for the Hearing Officer to address some concerns that are not limited to these two appraisers.Both Mr. Sebelius and Mr. Winkler have appeared before the Hearing Officer in various other appeals.The Hearing Officer respects that each has been recognized before the Commission as an expert in the field of real estate appraisal.
None of the comments, observations or discussion of the Hearing Officer should be read as a personal attack on either individual.They are not.Nor is the Hearing Officer questioning the professional standing of either gentleman.The foregoing discussion is a result of observing the work of various appraisers over recent years and concluding that while appraisals are presented within the guidelines of the Uniform Standards of Professional Appraisal Practice, they may still have serious deficiencies as evidence in an appeal.
The Hearing Officer will acknowledge that in rendering past decisions there are times when weaknesses in appraisal technique by appraisers, for both taxpayers and assessors, have been overlooked, or at least not given much attention.The matter should have been addressed in earlier decisions so as to provide guidance as to the expectations for appraisal work coming before the Commission in its appeals.Mr. Sebelius and Mr. Winkler just happened to have the misfortune to have been the two appraisers present in an appeal when the Hearing Officer elected to address a continuing concern and use their sales comparison approaches to illustrate the nature of part of the problem.The Hearing Officer can understand that both appraisers would most likely receive high marks if being graded on their appraisals.However, the responsibility of the Hearing Officer is not to give grades, but to examine, analyze and weigh evidence in order to satisfy the duty to conclude fair market value.Accordingly, the Hearing Officer views appraisals through an evidentiary set of glasses, which do not always provide the same focus as the glasses the appraisers may wear.
The assessed valuations for the subject property as determined by the Board of Equalization for St. Louis County for the subject tax day are SET ASIDE.
The assessed value for the subject property in Appeal 09-10176 for tax years 2009 and 2010 is set at $736,000.
The assessed value for the subject property in Appeal 09-10177 for tax years 2009 and 2010 is set at $784,000.
The assessed value for the subject property in Appeal 09-10178 for tax years 2009 and 2010 is set at $80,000.
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, 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 application for review is based will result in summary denial. 
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 January 26, 2012.
STATE TAX COMMISSION OFMISSOURI
W. B. Tichenor
Senior Hearing Officer
 Commercial property is assessed at 32% of its true value in money (appraised/fair market value).Section 137.115.5, RSMo
 The three separate parcels will be referred to collective in the singular, as the subject property, property under appeal, subject, etc., not in the plural.
 Exhibit A – Summary of Important Data and Conclusions – Property Data; p. 34 – Site Data; Improvement Data, p. 38.
 Hermel, Inc. v. STC, 564 S.W.2d 888, 895 (Mo. banc 1978); Chicago, Burlington & Quincy Railroad Co. v. STC, 436 S.W.2d 650, 656 (Mo. 1968); May Department Stores Co. v. STC, 308 S.W.2d 748, 759 (Mo. 1958)
 United Missouri Bank of Kansas City v. March, 650 S.W.2d 678, 680-81 (Mo. App. 1983), citing to State ex rel. Christian v. Lawry, 405 S.W.2d 729, 730 (Mo. App. 1966) and cases therein cited.
 Hermel, supra; Cupples-Hesse Corporation v. State Tax Commission, 329 S.W.2d 696, 702 (Mo. 1959)
 Both Complainant’s and Respondent’s direct cases prima facie rebutted the presumption of correct assessment.
 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).
 Daly v. P. D. George Company, et al, 77 S.W.3d 645, 649 (Mo. App E.D. 2002), citing, Equitable Life Assurance Society v. STC, 852 S.W.2d 376, 380 (Mo. App. 1993); citing, Stephen & Stephen Properties, Inc. v. STC, 499 S.W.2d 798, 801-803 (Mo. 1973).
 Real Estate Appraisal Terminology, Society of Real Estate Appraisers, Revised Edition, 1984; See also, Real Estate Valuation in Litigation, J. D. Eaton, M.A.I., American Institute of Real Estate Appraisers, 1982, pp. 4-5; Property Appraisal and Assessment Administration, International Association of Assessing Officers, 1990, pp. 79-80; Uniform Standards of Professional Appraisal Practice, Glossary.
 See, Nance v. STC, 18 S.W.3d 611, at 615 (Mo. App. W.D. 2000); Hermel, supra;Xerox Corp. v. STC, 529 S.W.2d 413 (Mo. banc 1975).
 St. Joe Minerals Corp. v. STC, 854 S.W.2d 526, 529 (App. E.D. 1993); Aspenhof Corp. v. STC, 789 S.W.2d 867, 869 (App. E.D. 1990); Quincy Soybean Company, Inc., v. Lowe, 773 S.W.2d 503, 504 (App. E.D. 1989), citing Del-Mar Redevelopment Corp v. Associated Garages, Inc., 726 S.W.2d 866, 869 (App. E.D. 1987); and State ex rel. State Highway Comm’n v. Southern Dev. Co., 509 S.W.2d 18, 27 (Mo. Div. 2 1974).
 Exhibit A, pp. 50 – 60 – Market Approach; pp. 61 – 84 – Income Approach;Exhibit 1, pp. 35 – 38 – Income Approach; pp. 39 – 58 – Sales Comparison Approach
 Exhibit 1, pp. 59 – 60 – Reconciliation and Final Conclusion of Value.Although Mr. Winkler stated on p. 60 “more weight has been placed on the income approach rather than the sales comparison approach,” he in fact concluded the value to be $9,320,000 the value indicated by the income approach.So no weight was actually given to the sales comparison approach.
 Section 490.065, RSMo; State Board of Registration for the Healing Arts v. McDonagh, 123 S.W.3d 146 (Mo. SC. 2004); Courtroom Handbook on Missouri Evidence, Wm. A. Schroeder, Sections 702-505, pp. 325-350; Wulfing v. Kansas City Southern Industries, Inc., 842 S.W.2d 133 (Mo. App. E.D. 1992).
 See, 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).Industrial Development Authority of Kansas City v. State Tax Commission of Missouri, 804 S.W.2d 387, 392 (Mo. App. 1991).
 In the fall of 2010, the largest vacant area was leased.A rent concession was made for a seven month period, so that no rent was paid until May, 2011.The rent commission would cover another approximately 5 months, so that no actual rent to Complainant would be received until approximately November 2011.There was no evidence that as of January 1, 2009 a prospective purchaser would have been able to know that approximately 17 months later a tenant would be located for most of the vacant space.Accordingly, the rental of this vacant area in late 2010 cannot be considered in concluding value as of January 1, 2009.
 The Appraisal of Real Estate, 13th Edition, The Appraisal Institute, 2008, p. 307, See also, Quantitative Adjustments, pp. 316 – 320, and Qualitative Analysis, pp. 320 – 322.
 Trend analysis, Relative Comparison analysis and Ranking analysis are recognized by the Appraisal Institute as qualitative analysis techniques.Id. p. 320.
 In a triple net expenses pass through to tenants based on percentage of square feet occupied.The Common Area Maintenance (CAM) is collected and applied as additional income to offset expenses like insurance, taxes, common area maintenance and other expenses.Exhibit A, p. 75 – Additional Income: CAM
 IREM stands for International Real Estate Managers according to the testimony of Mr. Winkler – Tr 57:25 – 57:7
According to its website – IREM is the Institute of Real Estate Management
 Complainant’s Brief, p. 14 – The True Value of the Property is $5,000,000
Potential Gross Income:$2,004,181
Vacancy & Credit:$ (801,672)
Effective Gross Income:$1,202,508
Net Operating Income:$600,966