Colony of St. Louis v. Brooks (SLCO)

State Tax Commission of Missouri

 

COLONY OF ST. LOUIS,                            )

)

Complainant,                           )

)

v.                                                         )           Appeal(s) Number 07-12185 & 07-12186

)

MICHAEL BROOKS,                                   )

ACTING ASSESSOR,                                  )

ST. LOUIS COUNTY, MISSOURI,             )

)

Respondent.                            )

 

 

ORDER

SETTING ASIDE HEARING OFFICER DECISION

UPON APPLICATION FOR REVIEW

 

On June 28, 2010, Senior Hearing Officer W. B. Tichenor entered his Decision and Order (Decision) setting aside the assessments by the St. Louis County Board of Equalization and setting the values for the properties under appeal.[1]

Respondent timely filed his Application for Review of the Decision.[2]  Complainant 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.[3] 

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 he 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.[4] 

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.[5] 

DECISION

 

Respondent’s Grounds for Review

Respondent presents the following grounds for review:[6]

1.         The Hearing Officer erred because he relied on only one approach to value, the income approach and ignored the comparable sales approach evidence.

2.         The Hearing Officer erred because he incorrectly and impermissibly mixed features of both the direct capitalization method and the discounted cash flow approach.

Reliance on Income Approach – Ignoring Comparable Sales Approach

The Hearing Officer recognized that both appraisers developed the sales comparison and income approaches.[7]  As the Decision notes, it is within the purview of the Hearing Officer to determine the method of valuation to be adopted in a given case.[8] 

It can be difficult to draw valuation conclusions from comparable sales of apartment complexes because of variables inherent to the properties, so the Commission cannot find that the hearing officer erred in only relying upon the income approach to value.  However, when Complainant presents evidence demonstrating that adequately managed comparable apartments are selling for $39,000 to $49,700 per unit and Respondent presents evidence demonstrating that comparable apartments are selling for $37,900 to $53,360 per unit, it should encourage the trier of fact to review evidence to determine why the subject property should be valued at only  $23,000 to $24,000 per unit.  In this instance, Complainant’s appraiser testified that he made significant adjustments to the comparable sales due to the decision to expense capital improvements made to the subject property (Tr. 35). 

Because we find that expensing capital improvements is an inappropriate appraisal technique, as set forth below, we conclude that Complainant’s opinion of value — based upon his sales comparison approach — necessarily understates the value of the property.  And, by removing this conflicting testimony as to value under the sales comparison approach, the reliability of the evidence of market sales is entitled to greater weight than originally determined by the hearing officer.

Incorrect Application of the Income Approach

Respondent argues that the analysis of the income approach was flawed because the hearing officer incorrectly and impermissibly mixed features of the direct capitalization method and the discounted cash flow approach.  The specific claim of error is that the Hearing Officer utilized actual expenses, including capital expenditures, instead of relying on an expense ratio “within industry norms.” 

 “Capital Improvements include additions to the property that may be made at any point in time and are not necessary to maintain the level of income at any given point.  Capital improvements ordinarily result in an increase in the total value of the property, in the economic life of the property, or in the income of the property, or in all three.  Therefore, these expenditures are not considered annual charges and should not be deducted from the effective gross income.” Property Assessment Valuation, International Association of Assessing Officers, 1977, p. 221.

“Expenditures for capital improvements do not recur annually and therefore should not be included in an estimate reflecting the typical annual expenses of operation.  Capital improvements may enhance value by increasing the annual net operating income or economic life of the property, but the capital expenditure is not a periodic operating expense.”  The Appraisal of Real Estate, Appraisal Institute, Eleventh Edition, 1996, p. 498.

It is without dispute that Complainant’s appraiser expensed capital improvements (transcript pgs. 25, 31, 34, 35)  although it appears that the non-recurring expenses were actually added back into expenses a second time rather than deducted from same (Ex. A, p. 88).  The hearing officer erred when he stated that Mr. Green had “made a deduction for the amounts shown for non-recurring expenses.”  (Decision p. 9).  No doubt this was a scrivener’s error on the part of the appraiser, but it demonstrates the advantages of using more orthodox methods of income and expense calculation to avoid addition and subtraction errors.

Finally, it is not sufficient to merely argue that “non-recurring expenses” were removed from the expense calculation.  When the subject property’s expense ratio is significantly higher than the market would indicate to be appropriate; and it is obvious that some of those expenses include inappropriate capital improvements; to be entitled to any weight, it is incumbent upon an appraiser to demonstrate that the expenses which he has determined to use are no more than repairs and maintenance.  “This category includes expenses necessary to keep the property operating and covers the repair of such items as the roof, water heaters, cooling systems, broken glass, and painting.  This category should not be confused with reserves for replacement.  Expenses in the category “reserves for replacement” are anticipated, predetermined expenses, with an annual charge set up for replacement.  Repairs and maintenance are normal maintenance expenses necessitated by the physical use of the property.”  Property Assessment Valuation at pg. 218. 

Respondent’s second point on appeal is well taken.  Use of capital expenditures in the expense calculations understated the value of the real property. 

COMMISSION SETS VALUE

            1.         The operating income, as proposed by Complainant, is $2,560,254.

            2.         The expense ratio, as established by market data, is between 45.86% and 51.1%   (Ex. A, p. 68; Ex. 1, p. 45).  An appropriate expense ratio for the subject property, including a 5% reserve for replacement, is 48.85% ($1,250,684)

            3.         The net operating income for the subject property is $1,309,570 ($2,560,254 – $1,250,684 = $1,309,570).

            4.         The correct capitalization rate is 9.1779, as proposed by Complainant (Ex. A, p. 87). 

            5.         The market value for the subject property, for tax years 2007 and 2008 is $14,268,730.  ($1,309,570/.091779 = $14,268,732 say $14,268,730), or $44,870 per unit.

ORDER

The decision of the hearing officer is SET ASIDE.  The Clerk is hereby ORDERED to place the following assessed values on the subject properties for tax years 2007 and 2008:

 

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 St. 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 March 16, 2011.

 

STATE TAX COMMISSION OF MISSOURI

Bruce E. Davis, Chairman

Randy B. Holman, Commissioner

 

 

 

 

 

DECISION AND ORDER

 

HOLDING

 

Decisions of the St. Louis County Board of Equalization reducing the assessments made by the Assessor are SET ASIDE. 

True value in money for the subject property in Appeal 07-12185 for tax years 2007 and 2008 is set at $3,250,630, residential assessed value of $617,620. 

True value in money for the subject property in Appeal 07-12186 for tax years 2007 and 2008 is set at $4,488,970, residential assessed value of $852,900. 

Complainant appeared by Counsel Michael Regan.  Respondent appeared by Assistant County Counselor Paula J. Lemerman.

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

ISSUE

Complainant appeals, on the ground of overvaluation, the decisions of the St. Louis County Board of Equalization, which reduced the valuation of the subject properties.  The Commission takes these appeals to determine the true value in money for the subject properties on January 1, 2007.  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 September 22, 2009, at the St. Louis County Government Center, Clayton, Missouri. Respondent’s Post-Hearing Brief was received by the Commission on

March 19, 2010.  Complainant’s Post-Hearing Brief was received by the Commission on

April 27, 2010.

 

2.         Assessment.  The Assessor appraised the property in Appeal 07-12185 at $7,789,400, a residential assessed value of $1,479,990.  The Board reduced the value to $6,864,000, assessed value of $1,304,160.  The Assessor appraised the property in Appeal 07-12186 at $10,304,600, a residential assessed value of $1,957,870.  The Board reduced the value to $9,672,000, assessed value of $1,837,680.[9] 

The combined value as set by the Board for the two properties was $16,536,000, assessed value of $3,141,840

3.         Subject Property.  The subject property in Appeal 07-12185 is located at 12464 Ardwick, St. Louis, Missouri.  The property is identified by locator number 15O420066.  The property contains 132 rental units.  The subject property in Appeal 07-12186 is located at 12360 Ardwick, St. Louis, Missouri.  The property is identified by locator number 15O420055.  The property contains 186 rental units.  

The apportionment of value between the two properties based on the percentage of number of units of the total combined units of 318 is:  Appeal 07-12185 – 42% and Appeal 07-12186 – 58%.[10]  The two properties are operated as a single economic unit.  They are collectively known as The Colony Apartments – subject property, property under appeal. 

4.         Complainant’s Evidence.  The following exhibits were received into evidence on behalf of Complainant:  Exhibit A – Appraisal of Michael A. Green – conclusion of value $7,500,000; Exhibit B – Written Direct Testimony of Mr. Green. 

There was no evidence of new construction and improvement from January 1, 2007, to January 1, 2008, therefore the assessed value for 2007 remains the assessed value for 2008.[11]

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, 2007.

5.         Respondent’s Evidence.  The following exhibits were received into evidence on behalf of Complainant:  Exhibit 1 – Appraisal of John M. Gillick – conclusion of value $16,000,000; Exhibit 2 – Written Direct Testimony of Mr. Gillick; Exhibit 3 – Apportionment of Value.

6.         Approaches to Value. Both appraisers developed the sales comparison approach and the income approach to arrive at their conclusions of value.[12]  The income approach is the most appropriate methodology for the valuation of the subject property.

7.         Conclusion of Value.  Based upon the income approach, the concluded value for the combined properties is $7,739,600.  The allocated values are:  Appeal 07-12185 – $3,250,630; Appeal 07-12186 – $4,488,970.[13]

CONCLUSIONS OF LAW AND DECISION

Jurisdiction

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.[14] 

Presumptions In Appeals

There is a presumption of validity, good faith and correctness of assessment by the County Board of Equalization.[15]  The presumption in favor of the Board is not evidence.  A presumption simply accepts something as true without any substantial proof to the contrary.  In an evidentiary hearing before the Commission, the valuation determined by the Board is accepted as true only until and so long as there is no substantial evidence to the contrary.  The presumption of correct assessment is rebutted when the taxpayer, or respondent when advocating a value different than that determined 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.[16] 

Complainant’s evidence met the required standard of substantial and persuasive and thus rebutted the presumption of correct assessment.  Furthermore, the evidence was competent to establish the true value in money for the property under appeal as of January 1, 2007, as is developed and addressed herein.

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.[17]  True value in money is defined in terms of value in exchange and not value in use.[18]  It is the fair market value of the subject property on the valuation date.[19]  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.[20]

 

            Both appraisers performed their appraisals relying on the Standard for Valuation.[21]

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.[22]  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 he 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.[23] 

The Hearing Officer was presented with opinions of value from two experts.  A detailed examination, of each of the approaches to value developed in both Complainant’s and Respondent’s appraisals, has led the hearing officer to conclude that the probative weight of the Green appraisal is superior to that of the Gillick 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.[24]  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.[25]  For the present valuation problem, the income approach to value based upon the historic performance of the subject property provided the soundest indicator of its true value in money.  This was the methodology employed by Complainant’s appraiser.  The income approach to value relying on the actual income stream for the property under appeal most clearly reflects what a hypothetical investor would have considered in purchasing the subject property on January 1, 2007.

Determination of True Value in Money

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 January 1, 2007.[26]  There is no presumption that the taxpayer’s opinion is correct. The taxpayer in a Commission appeal still bears the burden of proof.  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.”[27]  In an appeal based upon overvaluation, evidence that establishes that the true value in money is less than that set by the Assessor or the Board, as the case may be, proves the vital element that the assessment was “unlawful, unfair and improper,” in that the value set by the assessment authority was greater than the property’s actual fair market value.

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.[28] 

Substantial evidence can be defined as such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.[29]  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.[30]  The conclusion of value developed by Complainant’s appraiser relying upon the income approach to value supported by the property’s historic income and expense performance constitutes substantial and persuasive evidence.

Income Approach Differences

The appraisers were essentially in agreement regarding the income capability of the subject.  Mr. Gillick forecasted total income at $2,559,274.  Mr. Green’s estimate of total income was slightly higher at $2,560,254.[31]  The essential differences between the income approach developed by Mr. Green and that relied upon by Mr. Gillick are as follows: (1) Renting Expense; (2) Repairs/Maintenance Expense; (3) Reserve for Replacements; and (4) Capitalization Rate.

Complainant’s appraiser developed a pro-form projection based upon the prior three years historical income and expense data for the property to conclude a value for 2007.  Respondent’s appraiser developed his income analysis relying for the most part on the 2006 income and expense data, but he then applied industry norms for Renting expense, Repairs/Maintenance expense and Reserve for Replacements.

Renting Expense

The actual renting expenses for the subject property for 2004, 2005 and 2006 respectively were $141,560, $145,785 and $122,595.[32]  Mr. Green utilized a renting expense of $142,000.[33]  This was reflective of the 2004 and 2005 historical data for this expense item.  The 2006 year involved a fall in commissions and concessions to residents for referring a new renter.  It was expected that the expense item would move in 2007 to the more typical levels reflected by 2004 and 2005.[34]  

Mr. Gillick disregarded the actual performance of the property and allowed only $75,000 for renting expense.[35]  The explanation provided by Mr. Gillick for understating the renting expense by approximately $48,000 to over $70,000 was the adjustment was made to “reflect stabilized levels.”[36]  However, $75,000 does not represent the stabilized level for the amounts of this expense item for the prior three years.  The stabilized level would fall closer to $136,600.

The Green appraisal expense item for renting expense is well supported by the property’s historical performance.  It is representative of what a well informed buyer would have considered in making a determination as to a purchase price for the property on January 1, 2007. The use of only $75,000 for renting expense by Mr. Gillick seriously understated the amount of this expense item.  It is implausible that a knowledgeable buyer of the property on January 1, 2007, would have disregarded nearly 40% to over 48% of the actual renting expenses in determining the net operating income of the subject property.

Repairs/Maintenance Expense

The expenses for repairs and maintenance on the property under appeal exceed what one would expect to find in the subject’s market.[37]  For the years 2004, 2005 and 2006, Repairs and Maintenance expense was reported in the Green Expense Analysis at $382,986, $484,222 and $558,989.  However, these amounts included certain non-recurring expenses that would normally be addressed via a reserve for replacement deduction.  The amounts per respective years were: $148,605, $225,376 and $184,896.[38] 

The Green appraisal calculated total operating expenses which included the Repairs and Maintenance expenses cited.[39]  However, he then made a deduction for the amounts shown for the non-recurring expenses.  This properly addressed the removal of expenses that would normally been amortized and accounted for under a reserve for replacement.  The appraiser could have addressed the matter by backing out the non-recurring items first from each of the year’s Repairs and Maintenance Expenses.  This would have shown lower amounts on the annual itemized listings.  However, the net effect would have been unchanged.  The net operating amounts would have come out the same. 

Mr. Gillick addressed the Repairs/Maintenance expense item by apparently applying what he determined to be an industry norm of 2.5% of the total net income or $63,982.[40]   The stabilized Repairs/Maintenance Expense for 2004, 2005 and 2006 based on the actual historical performance calculates to $475,400.  A deduction of the stabilized non-recurring expenses of $186,300 would result in a historical stabilized Repairs/Maintenance expense of $289,100.  The use of only $63,982 by Mr. Gillick for Repairs/Maintenance resulted in an unacceptable understatement of expenses, causing a sever overstatement of the net operating income for the subject property.   Here again, there is no sound logic, based upon the historical performance of this property, to conclude that a well informed buyer would agree to a purchase price relying on a repairs and maintenance expense item that falls over $225,000 or nearly 78% below the actual stabilized amount for this expense item.

Any prudent purchaser would have discovered in a due diligence investigation that the subject was achieving market rents, only by keeping the property running at, in the words of Mr. Green, “an inordinately high expense ratio.”[41]  Any offer to purchase would have been impacted by this fundamental fact.  There is no basis in sound logic or evidence in the record to conclude that a well informed purchaser would have ignored the sound historical data on the subject’s income stream and deferred to unrelated industry standards and averages.  As far as expenses to keep the property operating, the subject is far above any average for the apartment industry.

Reserve for Replacement

Mr. Gillick applied a 5% factor to arrive at his amount to deduct for a Reserve for Replacement expense.  Mr. Green did not include a deduction for a Reserve.  This was addressed in detail in the appraisal report in the analysis for Other Non-Recurring Expenses and Reserve for Replacements[42], as well as in Mr. Green’s testimony.[43]

It is clear to the Hearing Officer that Mr. Green did not “double-dip” with regard to a reserve for replacement.  The Hearing Officer is not certain, however, that Mr. Green took a single dip on this item.  It was acknowledged that a portion of the Repairs/Maintenance expense included what generally would be considered nonrecurring items, but they were recurring.  Mr. Green backed out these expense amounts to arrive at his final net operating income. 

As discussed above, this was appropriate and Mr. Green’s conclusion of the amount for Repairs/Maintenance was proper for this appraisal problem.  However, having deducted from ordinary repairs and maintenance the amount for what would otherwise be covered by a reserve, no amount was then put back to account for the reserve.  Based upon Mr. Green’s research, an amount of $250 per unit to account for reserves could be supported.[44]  He elected to forgo the inclusion of this in his determination of net operating income.  The Hearing Officer will defer to the appraiser on this item that in his judgment a further deduction was not warranted.

Conclusion of NOI

From the forgoing, it is concluded that the Net Operating Income of $690,291[45], as determined by the Green income methodology is an accurate reflection, based upon the actual operating history of the subject, of what a well-informed perspective investor would rely on in concluding a purchase price for the subject.  The actual income and expenses for 2007 provide support for this conclusion of NOI.  The actual operation for 2007 resulted in a NOI of $683,816 or within just less than 1% of Mr. Green’s pro forma project.[46]

Capitalization Rate

The final point of difference[47] in the two income approaches relates to the capitalization rate concluded by each appraiser.  Mr. Green derived his capitalization rate after an analysis of comparable sales, investor surveys and mortgage/equity methodology.[48]  Comparable sales produced a range of capitalization rates from 6.92 to 8.30.  Investor surveys yielded ranges from 3.50 to 8.0 on a national basis, with an average of 5.89, and 7.00 to 9.00 on a regional basis, with an average of 8.0.  The mortgage equity technique developed by Mr. Green resulted in an indicate cap rate of 8.3.  He concluded on an 8% rate net of the effective tax rate of 1.1779.

Mr. Gillick relied on the mortgage equity methodology and concluded a 7.2 rate, net of the effective tax rate which he rounded to 1.18.

Both appraisers’ mortgage equity calculations are based upon surveys of local lenders.  Mr. Gillick determined financing would be available to the subject property based on the following factors:  .70 loan-to-value ratio at 6.5% for a term of 15 years, with an equity return of 8.5% on the .30 investment.  Mr. Green’s financing sources for his mortgage equity calculation concurred with Mr. Gillick with a 70% to 30% Loan/Equity split.  The loan term utilized by Mr. Green was a 10 year balloon note, with a 20 year amortization.  The loan rate was 6.5% as Mr. Gillick, however the equity return was 11.50%.

The Hearing Officer can conclude from this evidence that the loan to value ratio would be 70% at a 6.5% rate.  However, the actual length of the loan could vary from a straight 15 year note to a 10 balloon on a 20 year amortization.  Furthermore, the equity return from the two appraisers presents a significant gap of 3%.  It appears to the Hearing Officer that what would be more reflective of what actually was occurring in the market would have been a reporting of what was the actual financing arrangements on the sale properties used in each sales comparison approach.  What financial institutions report that they would be willing to lend on a given property, may not always correctly demonstrate what is actually going on in the market.  In actuality the financing arrangements on the various sales put forth by the appraisers may have established a significantly different picture of what financing on such a project as the purchase of the subject, would have been

The foregoing observation aside, the Hearing Officer is persuaded it is appropriate to utilize the capitalization rates of .07173%[49] and .08309%[50] as the brackets for the range.  There is no compelling evidence upon which the Hearing Officer can determine that one is more reflective of an appropriate capitalization rate than the other in January 2007.  Therefore, equal weight is placed on the opinions of each appraiser and the capitalization rate of .07741% is deemed appropriate for this appraisal problem.  To the capitalization rate the effective tax rate of

.01178 is added, resulting in the overall rate of .08919% to be applied to the net operating income to arrive at the indicated value under the income approach.

Conclusion of Value

Applying the overall rate of .08919% to the income of $690,291 provides an indicated value for the entire economic unit of the two properties of $7,739,556, rounded to $7,739,600.[51]  The value attributable to the property in Appeal 07-12185 is 42% of the total value or $3,250,630, rounded.  The value attributable to the property in Appeal 07-12186 is 58% of the total value of $4,488,970, rounded.

Sales Comparison Approaches Not Persuasive

Both appraiser presented data and a conclusion of value relying on the sales comparison approach.  Neither approach was found to be persuasive, and therefore, not determinative in this appeal.  The sales comparison approach when applied to an income producing property must account for the differences in the income streams between each comparable and the property being appraised.  The final element of comparability, and to the Hearing Officer the controlling element of comparability, is the income stream, i.e. income and expenses.

In other words, it is not ultimately the physical characteristics of comparison between one apartment building and the subject.  It is the fiscal element of comparison that provides the best indicator that two properties are sufficiently similar.  Two given properties may have very similar physical characteristics, such as age, quality of construction, location, size of units, amenities.  However, variances in either rental income or expenses may greatly diminish what otherwise would be a very sound physical comparison.  After an appraiser has adjusted for the physical differences between a sale property and the property being appraised, the careful analysis of the difference in income streams provides the final and all encompassing adjustment to bring the sale comparable in line to provide an accurate indicator of value for the subject property.  No matter how physically comparable  the comp and the subject may be, if the comp is operating with only a 40 – 45% expense ratio, but the subject is taking 60 – 65% in expenses to operate, the adjustments for physical differences has not completed the appraisal problem.  Consideration must be given to and further analysis and adjustment is called for to make the 40% expense comp reflective of the 60% expense subject.

                                                                       ORDER

The assessed valuations for the subject properties 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 07-12185 for tax years 2007 and 2008 is set at $617,620.

The assessed value for the subject property in Appeal 07-12186 for tax years 2007 and 2008 is set at $852,900.

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.  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, 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. [52]

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 June 28, 2010.

STATE TAX COMMISSION OF MISSOURI

W. B. Tichenor

Senior Hearing Officer