State Tax Commission of Missouri
| DBSI NORTHPOINTE TOWER LLC | ) | 17-79042 | |
| ) | |||
| Complainants | ) | ||
| ) | |||
| v. | ) | ||
| ) | |||
| DAVID COX, ASSESSOR | ) | ||
| PLATTE COUNTY, MISSOURI, | ) | ||
| ) | |||
| Respondent | ) |
DECISION AND ORDER
HOLDING
Decision of the Platte County Board of Equalization (BOE) is SET ASIDE. DBSI Northpointe Tower, LLC (Complainant) failed to present substantial and persuasive evidence to rebut the presumption of correct assessments by the BOE. However, Respondent presented substantial and persuasive evidence to rebut the presumption of correct assessment by the BOE.
Complainant appeared by attorney Brian Howes.
David Cox, the Assessor of Platte County (Respondent) appeared by attorney Robert Shaw.
Case heard and decided by Senior Hearing Officer John Treu (Hearing Officer).
ISSUE
Complainant initially appealed, on the grounds of discrimination and overvaluation. At the beginning of the evidentiary hearing Complainant’s counsel waived the discrimination claim. Respondent set the true value in money (TVM) of the subject at $6,596,652, commercial. The BOE set the TVM of the subject property at $6,596,652, commercial. Complainant contends the property has a TVM of $2,270,000
The Commission takes this appeal to determine the TVM for the subject property on January 1, 2017. The value as of January 1 of the odd numbered year remains the value as of January 1 of the following even numbered year unless there is new construction and improvement to the property. Section 137.115.1 RSMo
EVIDENCE
Complainant filed the following exhibits, which were admitted into the record:
| EXHIBIT | DESCRIPTION |
| A | Appraisal by Thomas Scaletty |
| B | Non-Binding Letter of Intent |
| C | List of Deferred Maintenance |
| D | Order of State Tax Commission |
The subject property is a 6.65 acre tract improved with a ten-story multi-tenant office building, constructed in 1985, containing 109,103 square feet of gross building area and 98,193 square feet of net rentable area. As of January 1, 2017 the improvement was 100% leased and 100% occupied. The largest tenant, American Dairy Farmers vacated 74% of the building in early 2017, leaving the building 26% occupied, but still 100% leased, as its lease does not expire until July 2018. The building is of concrete and glass construction.
Complainant’s appraiser, Thomas Scaletty (Scaletty) is a Missouri State Certified General Real Estate Appraiser. Scaletty is a Member of the Appraisal Institute (MAI). He is a former Treasurer and former board member of the Kansas City Chapter of the Appraisal Institute. He has over twenty years of experience as an appraiser.
Scaletty considered all three approaches to value the subject property. Scaletty developed all three approaches.
Under the cost approach Scaletty utilized the Marshall Swift Valuation Service. After adding in the land value of $1,160,000 Scaletty concluded a TVM of $2,350,000 based upon replacement cost new less depreciation and purported external obsolescence of $15,356,827. Scaletty estimated the external obsolescence by comparing “the value estimates from the Sales Comparison Approach and Income Approach” to his calculated Cost Approach figure. “The resulting difference [was] reflected as external obsolescence or depreciation due to the market.”
Under the sales comparison approach (market approach) Scaletty considered nine comparable sales. The sales occurred between December 2013 and August 2016. Scaletty calculated a sales price range of $17.39 to $62.18 per square foot. He also calculated a net operating income (NOI) range of $2.70 to $6.33 per square foot. Scaletty made adjustments for property rights, time/market conditions, age, improvement size, quality/design, location and deferred maintenance, resulting in an adjusted TVM value range of $13.24 to $36.61 per square foot. Scaletty concluded on a TVM of $22.50 per square foot of net rentable area resulting in a TVM of $2,210,000.
Under the income approach Scaletty noted “interviews with investors and brokers suggest that the direct capitalization method and [discounted cash flow] DCF are both preferred income analysis in this market. In this case, given the current large vacancy the direct capitalization method is considered unreliable and therefore will not be employed. The DCF method is relied upon as it will reflect the lease-up process.” (emphasis added) Scaletty considered six leases with lease rates ranging from $12.50 to $15.50 per square foot. Scaletty reconciled to a market rent of $15.00 per square foot. Scaletty utilized twenty-four lease comparables to estimate market expenses. Scaletty included real estate taxes as an expense, instead of adding such into his capitalization rate. Scaletty projected a stabilized vacancy 20% for the subject property. For his DCF method Scaletty calculated an NOI of $547,232. Scaletty utilized a capitalization rate of 9.5%. Scaletty concluded on a TVM of $2,490,000 under the DCF method.[1]
Scaletty ultimately determined the cost approach was unreliable to the subject property and that the income approach should be given little consideration due to market conditions and estimate of absorption. Thus he relied upon the sales comparison approach, but trended upward in consideration of the income approach. Scaletty opined a reconciled TVM of $2,270,000, as of January 1, 2017.
Respondent filed the following exhibits which were admitted into the record:
| EXHIBIT | DESCRIPTION |
| 1 | Appraisal by Timothy Keller |
| 2 | Lost Rent Calculation |
| 3 | August 5, 2016 Appraisal of Subject Property |
| 4 | July 15, 2017 Appraisal of Subject Property |
Respondent’s appraiser, Timothy Keller (Keller) is a Missouri State Certified General Real Estate Appraiser. Keller is a Member of the Appraisal Institute (MAI). Keller is a former Chairman of the Kansas Real Estate Appraisal Board. He is a former Chairman and former President of the Kansas City Chapter of the Appraisal Institute. He has over twenty-nine years of experience in appraising residential, commercial and other property in Missouri.
Keller considered all three approaches to value the subject property. Keller developed the income and sales comparison approaches. He did not develop the cost approach due to the age of the subject and the market conditions.
Under the sales comparison approach Keller considered five comparable sales. The sales occurred between November 2012 and November 2017. Keller calculated a sales price range of $24.24 to $37.19 per square foot. Keller made adjustments for location/access, age, size and quality, resulting in an adjusted TVM value range of $26.66 per square foot and $37.19 per square foot. Keller noted that “the subject requires some updates to its mechanical systems and parking lot [but that] all the sales are considered to be similar in condition and were not adjusted, as none of them have had any major updates.” Keller believed that due to the age and condition of the comparables as compared to the subject property, that the adjusted sales prices reflected the same type deferred maintenance of the subject that also existed in the comparables. Keller concluded on a TVM of $34.00 per square resulting in a TVM of $3,330,000.
Under the income approach Keller considered six recent and current market leases with lease rates ranging from $13.71 to $16.04 per square foot. Keller made adjustments to the market rates for age, location/access and quality of construction resulting in a calculated adjusted lease rate range of $14.89 to $16.84 per square foot. Keller reconciled to a market rent of $16.00 per square foot. Keller opined a stabilized vacancy and collection loss of 20% of potential gross income. Keller considered historical expenses for the subject and five expense comparables to estimate market expenses. Keller calculated a NOI of $619,764. Keller then developed a capitalization rate. Utilizing the Direct Capitalization method Keller considered six sales with a range of actual rates from 6.70% to 10.08% and pro forma rates from 8.51% to 10.17%. Keller reconciled an overall capitalization rate of 9.00%. He added an effective tax rate of 2.76% for an overall opined capitalization rate (or loaded capitalization rate) of 11.76%. Based upon the foregoing, Keller calculated a capitalized TVM under the direct capitalization method of $5,270,102.04. Keller calculated cost to stabilize of $2,700,000, resulting in an indicated TVM under the income approach of $2,570,000.
Keller noted that the subject property is relatively strong in the submarket. He also noted that rents have remained stable and that the five year absorption rate was positive.
After considering the two developed approaches to value and considering the characteristics of each, Keller relied most heavily on the sales comparison approach opined a reconciled TVM of $3,200,000, as of January 1, 2017.
The Hearing Officer, having considered all of the competent evidence upon the whole record, enters the following Decision and Order.
FINDINGS OF FACT
- Jurisdiction. Jurisdiction over this appeal is proper. Complainant timely appealed to the State Tax Commission from the decision of the BOE.
- Evidentiary Hearing. An Evidentiary Hearing was held on June 14, 2018, at the Platte County Administration Building, Platte City, Platte County, Missouri.
- Identification of Subject Property. The subject property is identified by parcel/locator number 17-7.0-36-000-006-003.000. It is further identified as 10220 N. Ambassador Drive, Platte County, Missouri. (Complaint for Review of Assessment, Exhibit A and Exhibit 1)
- Description of Subject Property. The subject property is a 6.65 acre tract improved with a ten-story multi-tenant office building, constructed in 1985, containing 109,103 square feet of gross building area and 98,193 square feet of net rentable area. As of January 1, 2017 the improvement was 100% leased and 100% occupied. The largest tenant, American Dairy Farmers vacated 74% of the building in early 2017, leaving the building 26% occupied, but still 100% leased, as its lease does not expire until July 2018. The building is of concrete and glass construction. (Exhibit A and Exhibit 1)
- Assessment. Respondent valued the subject property at $6,596,652, as commercial, as of January 1, 2017.
- Board of Equalization. The BOE valued the subject property at $6,596,652, as commercial, as of January 1, 2017, thereby lowering Respondent’s valuation.
- No Evidence of New Construction & Improvement. Sufficient evidence of new construction and improvement from January 1, 2017, to January 1, 2018 and the resulting impact on TVM was not presented; therefore, the assessed value for 2017 remains the assessed value for 2018. Section 137.115.1, RSMo.
- Presumption of Correct Assessment Not Rebutted. Complainants’ evidence was not substantial and persuasive to rebut the presumption of correct assessment by the BOE.
- Summary of Valuations.
| Replacement Cost | Income | Sales | Reconciled | |
| Complainant | $2,350,000 | $2,490,000 (DCF) | $2,210,000 | $2,270,000 |
| Respondent | $2,570,000 (Dir. Cap.) | $3,330,000 | $3,200,000 | |
| Determined | ||||
| BOE TVM | $6,596,652 |
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. Article X, Section 14, Mo. Const. of 1945; Sections 138.430, 138.431, 138.431.4, RSMo.
Presumption In Appeal
There is a presumption of validity, good faith and correctness of assessment by the County Board of Equalization. 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). The presumption of correct assessment is rebutted when the taxpayer 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. Hermel, supra; Cupples-Hesse Corporation v. State Tax Commission, 329 S.W.2d 696, 702 (Mo. 1959).
Substantial evidence can be defined as such relevant evidence as a reasonable mind might accept as adequate to support a conclusion. See, Cupples-Hesse, supra. Persuasive evidence is that evidence which has sufficient weight and probative value to convince the trier of fact. The persuasiveness of evidence does not depend on the quantity or amount thereof but on its effect in inducing belief. Brooks v. General Motors Assembly Division, 527 S.W.2d 50, 53 (Mo. App. 1975).
Complainants’ Burden of Proof
In order to prevail, Complainants 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, 2013. Hermel, supra. 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.” 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).
Standard for Valuation
Section 137.115, RSMo, requires that property be assessed based upon its TVM 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. 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).
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. 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). 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. 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).
Cost Approach
The cost approach may be based on either reproduction cost or replacement cost. The reproduction cost, or cost of construction, is a determination of the cost of constructing an exact duplicate of an improved property using the same materials and construction standards. The replacement cost is an estimate of the cost of constructing a building with the same utility as the building being appraised but with modern materials and according to current standards, design and layout. The cost approach is most appropriate when the property being valued has been recently improved with structures that conform to the highest and best use of the property or when the property has unique or specialized improvements for which there are no comparables in the market. While reproduction cost is the best indicator of value for newer properties where the actual costs of construction are available, replacement cost may be more appropriate for older properties. Snider v. Casino Aztar/Aztar Missouri Gaming Corp., 156 S.W. 3d, 341, 347 (Mo. 2005). (citations omitted).
The cost approach must be independent. Any attempt to find economic obsolescence in the cost approach simply because the cost approach valuation does not match with other methods is essentially an income shortfall methodology or strips the cost approach as an independent valuation method. The income shortfall method has not been recognized by Missouri courts and has been criticized by other States’ courts. The following has been stated about such approach:
“At best [the] income deficiency method is illogical … [and] at worst [the] income-deficiency method strips the cost approach of its use as an independent determiner of value, because it always will track the result under the income approach.” Delta Air Lines, Inc. v. Dept. of Revenue of Oregon, 291 P.2d 836 (Oregon 1999)
“A significant problem with [the] income shortfall methodology is that it converts what should be two separate, stand-alone indicators of value (cost approach and income approach), into one indicator of value by adjusting the cost approach with [an] income shortfall.” Puget Sound Energy, Inc. v. Department of Revenue of the State of Montana, 2012 WL 5906944 (Mont.Tax.App.Bd.)
Additionally in State of Alaska, Department of Revenue v. BP Pipelines, Inc., 354 P.3d 1053 (Alaska 2015), the Court noted a lack of wide recognition of the Income Shortfall Method in authoritative sources.
DCF/Income Approach
The use of DCF can be problematic. One court held: “The DCF method, as applied to tax valuation proceedings, is an amalgam of interdependent, attenuated assumptions of limited probative value. Whatever may be its utility in other contexts, its use in this case can only be described as an exercise in financial haruspication.” University Plaza Realty Corp. v. City of Hackensack, 12 N.J. Tax 354 (N.J. Tax 1991), aff. 264 N.J. 343, 624 2d 1000 (App. Div.)
In short, there is a great deal of guesswork that goes into a discounted cash flow analysis. The fact that some investors rely on this methodology, does not increase its accuracy or reliability. Consequently, any income approach, based upon the DCF, is of little to no value in making a determination of TVM.
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. 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).
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. 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).
Discussion
In the present appeal two appraisals were presented, one by each party. Each appraisal was considered by the Hearing Officer. Scaletty’s cost approach is unpersuasive, in that, his opined economic obsolescence was based upon the mixing of valuation approaches. He simply subtracted the average of his sales comparison approach and income approach from his initial cost approach valuation so that it would equal such average. Consequently, Scaletty’s cost approach is not considered to be reliable.
Additionally, Scaletty’s income approach is unpersuasive as it is based upon the DCF method. As stated above, “the DCF method, as applied to tax valuation proceedings, is an amalgam of interdependent, attenuated assumptions of limited probative value.” Surprisingly, Scaletty’s “useful exercise” of calculating a TVM utilizing a direct capitalization method, resulted in a TVM of $2,550,000, only $20,000 lower than Keller’s income approach utilizing the direct capitalization method.
Notwithstanding the foregoing, both Scaletty and Keller stated that the sales comparison approach is the most appropriate way to value the subject property due to the nature of the subject property and the submarket it is in. Consequently, the sales comparison approach will be primarily relied upon by the Hearing Officer. The Hearing Officer further finds Keller’s sales comparison approach the most persuasive. Keller considered what the sales prices of his comparables would reflect, including deferred maintenance, factoring in their similar conditions to the subject and the similar age to the subject. The Hearing Officer is not persuaded by Scaletty’s sales comparison approach. The Hearing Officer is not persuaded by the deferred maintenance adjustments of Scaletty. In particular, the Hearing Officer is not persuaded by the $850,000 in deferred maintenance cost for elevators, partially due to the fact that the subject property’s maintenance costs has not risen over the years, which would seem to indicate a lack of severe need. Consequently, no evidence was offered that any of the deferred maintenance, let alone the $850,000 for deferred maintenance of elevators was known to the market or would be reflected in the market as of January 1, 2017.
Giving the sales comparison approach the most weight, as did Keller, the Hearing Officer finds the TVM of the subject to be $3,200,000.
ORDER
The assessed valuation for the subject property as determined by the BOE for Platte County for the tax year 2017 is SET ASIDE. The Assessed Value is set at $1,024,000 ($3,200,000 TVM).
Application for Review
A party may file with the Commission an application for review of this decision within thirty days of the mailing date set forth in the Certificate of Service for this Decision. The application shall contain specific facts or law as grounds upon which it is claimed the decision is erroneous. Said application must be in writing addressed to the State Tax Commission of Missouri, P.O. Box 146, Jefferson City, MO 65102-0146, 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. Section 138.432, RSMo
Disputed Taxes
The Collector of Platte 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 July 20, 2018.
STATE TAX COMMISSION OF MISSOURI
John Treu
Senior Hearing Officer
Certificate of Service
Delivery or Notice of the information contained in this Order was made via email or U.S. Postage on this 20th day of July, 2018, to the following:
bhoweslaw@yahoo.com; rhshaw@mcginness-shaw.com; stephen.magers@co.platte.mo.us; spalmer@co.platte.mo.us
Jacklyn Wood
Legal Coordinator
[1] Although Scaletty considered the Direct Capitalization method to be unreliable, he calculated a TVM under such as “a useful exercise.” Scaletty calculated an NOI of $441,869. Scaletty utilized a capitalization rate of 9%. Scaletty calculated an indicated TVM of $4,909,650 under the Direct Capitalization method. He deducted $1,076,334 in deferred maintenance and $1,287,245 in tenant improvements and leasing commissions. Scaletty calculated a TVM of $2,550,000 under the Direct Capitalization method.