Drury 141 v. Brooks (SLCO)

State Tax Commission of Missouri

 

DRURY 141, L.L.P.,)

)

Complainant,)

)

v.) Appeal Number 07-11514

)

JAKE ZIMMERMAN, ASSESSOR,)

ST. LOUIS COUNTY, MISSOURI,)

)

Respondent.)

 

ORDER

AFFIRMING HEARING OFFICER DECISION

UPON APPLICATION FOR REVIEW

 

On September 21, 2010, Hearing Officer Maureen Monaghan entered her Decision and Order (Decision) affirming the assessment by the St. Louis County Board of Equalization and set the value for the property under appeal at $10,395,300, assessed value of $3,326,500.

Complainant filed an Application for Review of the Decision.

FINDINGS OF FACT

1.                  The Assessor appraised the property under appeal at $10,395,300, an assessed commercial value of $3,326,500.

2.                  The Board of Equalization sustained that assessment.

3.                  Complainant timely appealed to the State Tax Commission from the decision of the St. Louis County Board of Equalization.

4.                  An evidentiary hearing was conducted on November 18, 2009, at the St. Louis County Government Center, Clayton, Missouri.

5.                  On September 21, 2010, Hearing Officer Monaghan found that the Complainant failed to present substantial and persuasive evidence to establish the true value in money of the subject property as of January 1, 2007, therefore, the presumption of correct assessment by the Board was not rebutted.

6.                  On October 22, 2010, Complainant filed an application for review.

7.                  The subject property is located at #5 Lambert Drury Drive, Valley Park, Missouri.The property is identified by locator number 27Q630363.The tract of land is just over 2 acres and has been improved with a seven story, 175 room limited-service hotel with a gross area of 94,403 square feet.It operates as a Drury Inn & Suites Hotel.

8.      Both parties presented reports and testimony from expert witnesses.

9.                  Complainant’s appraiser is a Certified General Appraiser and is a candidate for the MAI designation.

10.              Respondent’s appraiser is a licensed Certified General Appraiser in the State of Missouri and holds the MAI designation from the Appraisal Institute.He has appraised property for over 35 years.

11.The Hearing Officer considered the testimony of the expert witnesses.She did not give the Complainant’s expert witness’ opinion as much weight and credit when viewed in connection with all other circumstances.The Hearing Officer was not persuaded by his opinion of value or by the valuation approach (Business Enterprise Approach) he employed. The business enterprise approach moves a disproportionate share of the hotel’s value out of the real property component and into the business and personal property components, thereby significantly reducing a hotel’s property tax assessment.

12.The methodology of valuation known as the Rushmore Approach is a more persuasive valuation methodology for hotels.The Rushmore Approach has been recognized by state and federal courts, the Missouri State Tax Commission, and by hotel owners and assessors’ offices, as the most appropriate approach for valuing hotel properties.The approach considers all the components of hotel revenue generation – land, improvements, personal property and the business operation- and allocates the value between the components.

13.The net operating income for the property is $1,307,387 based upon the history of the property.Expenses such as management and franchise fees as well as sales and marketing have been deducted.No additional deductions for such expenses are appropriate.A capitalization rate of 11.1% is appropriate.The effective tax rate for the property is 2.8%.An overall capitalization rate of 8.3% is appropriate as developed using the mortgage and equity formula. A review of sales indicates the capitalization rate is appropriate.“The overall capitalization rates (OAR) for all the sales ranged from 1.1 to 12.7 percent, averaging 8.6 percent.”[1]The resulting value for the property is $11,778,000.A deduction is made for furniture, fixtures and equipment resulting in a valuation of $11,076,000.

14.In any case in St. Louis County where the assessor presents evidence which indicates a valuation higher than the value finally determined by the assessor or the value determined by the board of equalization, whichever is higher, for that assessment period, such evidence will only be received for the purpose of sustaining the assessor’s or board’s valuation, and not for increasing the valuation of the property under appeal.[2]Under the Commission rule just cited and Supreme Court decision[3] the assessed value could not be increased above $3,326,500 in this particular appeal.Mr. Gillick’s opinion of value for the subject property as of January 1, 2007, was $11,100,000,[4] commercial assessed value of $3,552,000.On behalf of Respondent, the appraiser tendered his appraisal report and estimate of value in support of the value of $10,395,300 as originally set by the Assessor and sustained by the Board.

Complainant’s Alleged Errors

Complainant in its Complaint for Review of Assessment asserts the following errors on the part of the Hearing Officer:

1.The Hearing Officer erred in failing to make findings of fact as required by Missouri Law.

2.The Hearing Officer erred in Concluding that the Rushmore Approach is the Only Valid Approach for Determining the Value of a Hotel.

3.The Hearing Officer erred in finding that the Complainant’s evidence was not substantial and persuasive because the appraisal used the so-called “Business Enterprise Approach.”

4.The Hearing Officer erred in failing to recognize the Complainant’s appraiser made appropriate deductions from income for business value and personal property.

a.The Hearing Officer erred in failing to accept as substantial and competent evidence complainant’s method of deducting business value as consistent with Missouri Law.

b.The Hearing Officer erred in failing to accept as substantial and competent evidence complainant’s method of allocating income attributable to personal property as consistent with Missouri Law.

5.The Hearing Officer erred in finding that Complainant’s evidence was not substantial and persuasive to rebut the presumption in favor of the Board’s value and establish true value in money as of January 1, 2007

a.The Hearing Officer erred in concluding that Complainant’s evidence is not substantial and persuasive to rebut the presumption in favor of the Board.

b.The Hearing Officer erred in not finding that the appraisal and testimony of Drury’s appraiser was substantial and persuasive evidence to establish the true value in money as of January 1, 2007.

6.The Hearing Officer erred in failing to investigate and correct the assessment after the presumption in favor of the Board was rebutted.

a.The Hearing Officer erred in failing to conclude that the cost and sales approaches relied on by the county were inappropriate methods of valuation of a hotel.

b.The Hearing Officer erred in failing to find the Respondent’s Income Approach contained multiple errors and was not substantial and competent evidence.

The Commission will address the allegations of error in the categories of (1) Findings of Fact; (2) Failure to Meet Burden of Proof; and (3) Valuation of Hotel Properties.

CONCLUSIONS OF LAW

Findings of Fact

Section 536.090, RSMo states “Every decision and order in a contested case shall be in writing, and, except in default cases or cases disposed of by stipulation, consent order or agreed settlement, the decision, including orders refusing licenses, shall include or be accompanied by findings of fact and conclusions of law. The findings of fact shall be stated separately from the conclusions of law and shall include a concise statement of the findings on which the agency bases its order.”

The law does not require that there be any explanation of why one set of facts was chosen over another. One may discern from the findings and conclusions the evidence which was accepted and the evidence which was rejected by the written decision.[5] A detailed summary of the evidence relied upon is not required. The basic facts upon which the decision rests are enough.[6]

The Hearing Officer did not find the “Business Enterprise Approach” to be appropriate for valuing a hotel.The Hearing Officer explained that the “Business Enterprise Approach”, an income method of valuation, overvalues the income attributable to the business and personal property components.The approach has not been recognized by the State Tax Commission. The approach and valuation presented by the Complainant’s appraiser was not persuasive.

The Hearing Officer stated that the Rushmore Approach was the appropriate methodology.The Hearing Officer further stated that the Commission has traditionally used the Rushmore approach and often cites its developer, Stephen Rushmore[7], in its hotel valuation decisions.

Failure to Present Substantial and Persuasive 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.[8]

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.[9]In this case, the Hearing Officer was not persuaded by the Complainant’s expert or his approach to value.

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.[10]

Hotel Valuation

Sales and Cost Approaches v. Income Approach

Complainant argues that the sales and cost approach of the Respondent is flawed and is not substantial and persuasive.There are three approaches for valuing property: cost, sales and income.The cost approach is given little weight when valuing hotels as it does not properly consider return on investment or projected income.The sales approach is also given little weight as differences between properties such as location, layout, and land/buildings impact income and can be difficult to recognize and measure for adjustment purposes.

The income approach is the most appropriate approach for income producing properties such as hotels.Hotels are specialized income producing properties with the income being derived from the land, improvements, personal property and the business operation.The issue in this case is the valuation of the land and improvements.Therefore, the appraisers must separate the components.

Rushmore v Business Enterprise Approach for Valuing Hotel Properties

Federal and State Courts, state agencies, county assessors and hotel owners, have relied on the valuation methodology for hotels developed by Stephen Rushmore, MAI, FRICS, CHA.Mr. Rushmore wrote all five books for the Appraisal Institute on the valuation of hotels and motels.It has been the standard for valuation of hotels for over twenty years.The Business Enterprise Approach (BEA) is a new methodology for valuation of hotels used by hotel owners for tax assessment purposes.

Both approaches attempt to stabilize the net income of the property.Both approaches develop a capitalization rate.Both approaches deduct management and franchise fees.Both approaches consider the income attributable to the furniture, fixtures and equipment.

The Rushmore approach considers all the components of income generation of hotels – land, improvements, personal property and the business operation- and allocates the value between the components.The business enterprise approach attributes more value to the personal property and business operation components of a hotel, hence, a lower valuation of the real property for tax assessment purposes.

Rushmore excludes the value of and income derived from fixtures, furniture and equipment (FF&E) and adjustments are made for replacement of the property and for a return on the FF&E.Rushmore deducts the expenses for items such as management fees, franchise fees and marketing.

The BEA excludes the expenses for FF&E, management fees, franchise fee, and marketing and then makes additional deductions for these same items.For example, marketing expenses are deducted from the income.The BEA also makes additional adjustments for marketing fees as “business start-up costs.”The additional deduction is not appropriate for hotels because hotels always need to generate new tenants/business.The expense of marketing for new business is an expense already accounted for when calculating net income.Since these costs are on-going for a hotel, making another deduction for start up costs is “double dipping.”The BEA makes the additional deductions for staffing in a hotel.Some industries would have a large initial expense for labor when initially opening.In the hotel industry, labor is constantly turning over and recruiting and hiring continues throughout the life of the property.It, again, is not a one-time expense but an on-going expense which is accounted for when making the expense deduction.

The BEA also excludes a value attributable to the franchise, goodwill, and other intangibles.“It moves a disproportionate share of the hotel’s value out of the real property component and into the business property component, thereby significantly reducing a hotel’s property tax assessment.”[11]

Other courts have agreed with Missouri State Tax Commissioners that Rushmore is the most appropriate methodology for valuation of hotels.In Kansas[12], the court stated that the Rushmore model is a valid method of valuing hotels. The court noted that although the hotel chain argued that the Rushmore model was invalid, the hotel chain could cite no cases in Kansas or any other court that found the model flawed.

Rushmore’s handling of expenses such as management fees has been recognized and found reasonable by courts.[13]Mr. Rushmore has been appointed by the courts to value hotels in litigation.[14] Courts have acknowledged him in decisions as “a well recognized and eminent expert in the field of hotel appraisers.”[15]

DECISION

A review of the record in the present appeal provides support for the determinations made by the Hearing Officer.There is competent and substantial evidence to establish a sufficient foundation for the Decision of the Hearing Officer.A reasonable mind could have conscientiously reached the same result based on a review of the entire record. The Commission finds no basis to support a determination that the Hearing Officer acted in an arbitrary or

capricious manner or abused her discretion as the trier of fact and concluder of law in this appeal.[16]

The Hearing Officer correctly found that Complainant failed to rebut the presumption of correct assessment by the Board and to establish what a willing buyer and seller would have paid for the property.The Hearing Officer did not err in her determination.

ORDER

The Commission upon review of the record and Decision in this appeal, finds no grounds upon which the Decision of the Hearing Officer should be reversed or modified.Accordingly, the Decision is affirmed.The Decision and Order of the hearing officer, including the findings of fact and conclusions of law therein, is incorporated by reference, as if set out in full, in this final decision of the Commission.

Judicial review of this Order may be had in the manner provided in Sections 138.432 and 536.100 to 536.140, RSMo within thirty days of the mailing date set forth in the Certificate of Service for this Order.

If judicial review of this decision is made, any protested taxes presently in an escrow account in accordance with this appeal shall be held pending the final decision of the courts unless disbursed pursuant to Section 139.031.8, RSMo.

If no judicial review is made within thirty days, this decision and order is deemed final and the Collector of Platte 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 May 12, 2011.

STATE TAX COMMISSION OF MISSOURI

Bruce E. Davis, Chairman

Randy B. Holman, Commissioner

 

 

DECISION AND ORDER

 

HOLDING

 

Decision of the St. Louis County Board of Equalization sustaining the assessment made by the Assessor is AFFIRMED.True value in money for the subject property for tax years 2007 and 2008 is set at $10,395,300, commercial assessed value of $3,326,500.Complainant appeared by Counsel Lisa Leary, St. Louis, Missouri.Respondent appeared by Associate County Counselor Paula Lemerman.Evidentiary hearing was conducted by Senior Hearing Officer W. B. Tichenor.

Case decided by Hearing Officer Maureen Monaghan.

ISSUE

Complainant appeals, on the ground of overvaluation and discrimination, the decision of the St. Louis County Board of Equalization, which sustained 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, 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 November 18, 2009, at the St. Louis County Government Center, Clayton, Missouri.

2.Assessment.The Assessor appraised the property at $10,395,300, assessed commercial value of $3,326,500.The Board sustained the assessment.[17]

3.Subject Property.The subject property is located at #5 Lambert Drury Drive, Valley Park, Missouri.The property is identified by locator number 27Q630363.The subject tract consists of 87,332 square feet, just over 2 acres.It is improved by a seven-story, 175 room limited-service hotel containing a gross area of approximately 94,403 square feet operating as a Drury Inn & Suites hotel, with supporting parking areas.[18]

4.Complainant’s Evidence.Complainant submitted the following exhibits which were received into evidence:

 

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.[20]

Complainant’s evidence was not 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 $7,800,000.[21]See, Complainant Failed To Prove Value of $7,800,000, infra.

5.Respondent’s Evidence.Respondent submitted the following exhibits which were received into evidence:

 

6.Evidence of Increase In Value.In any case in St. Louis County where the assessor presents evidence which indicates a valuation higher than the value finally determined by the assessor or the value determined by the board of equalization, whichever is higher, for that assessment period, such evidence will only be received for the purpose of sustaining the assessor’s or board’s valuation, and not for increasing the valuation of the property under appeal.[23]Under the Commission rule just cited and Supreme Court decision[24] the assessed value could not be increased above $3,326,500 in this particular appeal.Mr. Gillick’s opinion of value for the subject property as of January 1, 2007, was $11,100,000,[25] commercial assessed value of $3,552,000.On behalf of Respondent, the appraiser tendered his appraisal report and estimate of value in support of the value of $10,395,300 as originally set by the Assessor and sustained by the Board.

7.Conclusion of Value.The Complainant having failed to present substantial and persuasive evidence to establish the true value in money of the subject property as of January 1, 2007, the presumption of correct assessment by the Board was not rebutted.The true value in money of the subject property as of January 1, 2007, was $10,395,300, assessed commercial value of $3,326,500.

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.[26]

Presumption In Appeals

There is a presumption of validity, good faith and correctness of assessment by the County Board of Equalization.[27]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.[28]

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.[29]True value in money is defined in terms of value in exchange and not value in use.[30]It is the fair market value of the subject property on the valuation date.[31]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.[32]

 

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.[33]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.[34]

Complainant Failed To Prove Value of $7,800,000

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.[35]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.”[36]

Substantial evidence can be defined as such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.[37]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.[38]The evidence presented on behalf of Complainant through the Andreas appraisal report and testimony of Mr. Andreas did not constitute substantial and persuasive evidence to establish the true value in money of the property under appeal as of January 1, 2007 to be $7,800,000.

Valuation of Hotels

Hotel valuations need to consider the valuation attributable to the real, business, and personal property components.The Complainant’s appraiser, Mr. Andreas, used the “Business Enterprise Approach” while the Respondent’s appraiser, Mr. Gillick, used the “Rushmore Approach.”

The Hearing Officer does not find the “Business Enterprise Approach” to be appropriate for valuing a hotel.”Business Enterprise Approach”, an income method of valuation, overvalues the income attributable to the business and personal property components resulting in a reduced market valuation for the real property.

The “Rushmore Approach”[39] relied upon by Respondent’s appraiser is the appropriate methodology to determine the market value of the real property before the State Tax Commission.The Commission has traditionally used the Rushmore approach and often cites its developer Stephen Rushmore[40] in its hotel valuation decisions.

The appraisal of Mr. Andreas and his use of the “Business Enterprise Approach” did not provide substantial and persuasive evidence to sustain the value of $9,500,000 proffered.Upon the failure of the Complainant to meet its burden of proof, the presumption of the correct assessment by the Board stands.

ORDER

The assessed valuation for the subject property as determined by the Assessor and sustained by the Board of Equalization for St. Louis County for the subject tax day is AFFIRMED.

The assessed value for the subject property for tax years 2007 and 2008 is set at $3,326,500.

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 appeal is based will result in summary denial. [41]

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 September 21, 2010.

STATE TAX COMMISSION OFMISSOURI

Maureen Monaghan

Hearing Officer