STATE TAX COMMISSION OF MISSOURI
|FIRST MORGAN LLC,||)|
|Complainant,||)||Appeal No. 19-20116|
|v.||)||Parcel No. 00260000200|
|MICHAEL DAUPHIN, ASSESSOR,||)|
|CITY OF ST. LOUIS, MISSOURI,||)|
DECISION AND ORDER
First Morgan LLC, (Complainant) appeals the City of St. Louis Board of Equalization’s (BOE) decision finding the true value in money (TVM) of the subject commercial property on January 1, 2019, was $2,392,000, with an assessed value of $765,500. Complainant alleges overvaluation and asserts the TVM of the subject property on January 1, 2019, was $1,900,000. Complainant did not produce substantial and persuasive evidence of overvaluation. The BOE decision is affirmed.
Complainant appeared through counsel Patrick Keefe. Respondent appeared through counsel Chelsea Mannery. The evidentiary hearing was conducted at the St. Louis City Hall on September 14, 2020. Respondent filed a brief on November 20, 2020. Complainant filed a brief on December 11, 2020.
FINDINGS OF FACT
- The Subject Property. The subject commercial property is located at 719 North 1st Street in St. Louis, Missouri, in the Laclede’s Landing neighborhood. Laclede’s Landing is immediately north of the Gateway Arch and bounded by the Mississippi River to the east, Interstate 70 to west, and Carr Street to north.
The subject property consists of a 16,380 square-foot lot improved with a six-story office building. The building has approximately 100,000 square feet of gross building area and a net rentable area between 90,557 square feet and 93,884 square feet. (Ex. 1 at 2; Ex. A at 52) The building was constructed in 1874. The foundation is rubble stone and concrete. The structural supports are wood beams and cast iron columns. The exterior is brick. (Ex. A at 53) The latest renovation was in 2004.
The first floor consists of 14,860 square feet of restaurant space leased to a single tenant at $8.08 per square foot as of January 1, 2019. (Ex. A at 69; Ex. 1 at 55, 61) The remaining five floors have approximately 79,024 square feet of office space leased at an average of $14.47 per square foot as of January 1, 2019. (Ex. 1 at 48) In April 2019, the subject property was approximately 88% leased. (Ex. 1 at 32) In May 2020, it was approximately 85% leased. (Ex. A at 60)
- Assessment and Valuation. Respondent classified the subject property as commercial property and determined the assessed value on January 1, 2019, was $765,500. The BOE affirmed Respondent’s assessment.
- Complainant’s Evidence. Complainant submitted Exhibits A and B. Exhibit A is an appraisal report prepared by Kenneth McFarland, a licensed Missouri appraiser. Exhibit B is McFarland’s written direct testimony stating his credentials and restating the conclusions of his appraisal report. McFarland estimated the TVM of the subject property was $1,900,000 as of January 1, 2019. (Ex. A at 94, Ex. B at 19) McFarland’s value estimate is based on the income and sales comparison approaches, with “primary emphasis” given to the income approach. (Ex. A at 94; Ex. B at 17, 19)
To develop the income approach, McFarland utilized four comparable properties to conclude the market rent for the subject property’s office and restaurant space. McFarland estimated the market rent for the office space was $13.00 per square foot as of January 1, 2019. (Ex. A at 68-69) McFarland estimated the market rent for the subject property’s restaurant space was $11.00 per square foot as of January 1, 2019. (Ex. A at 76)
Based on the estimated market rent of $13.00 per square foot for the subject’s office space and $11.00 per square foot for the restaurant space, McFarland calculated a potential gross rent of $1,190,772; (79,024 square feet x $13.00) + (14,860 square feet x $11.00) = $1,190,772. (Ex. A at 78) McFarland added $76,775 for tenant reimbursements and $9,000 for miscellaneous income to estimate a potential gross income of $1,276,947. (Ex. A at 78) McFarland then deducted 15% for vacancy and collection losses and $730,788 in estimated expenses to calculate an estimated net operating income (NOI) of $354,617 ($1,276,947 x 0.85 – $730,788 = $354,617). (Ex. A at 79-81)
McFarland estimated an unloaded, pre-tax capitalization rate of 10%. (Ex. A at 83) The estimated capitalization rate is based on an investor survey, the band of investment method, and a debt coverage ratio analysis. The investor survey data is from the 4th Quarter 2018 Real Estate Research Corporation Real Estate Report. (Ex. A at 81-82) The Report surveyed properties “in the Midwest” and indicated a capitalization rate “between 6.0% and 9.5% with an average of 8.0%.” (Ex. A at 82) McFarland reasoned the “additional risk” posed by the subject property due in part to “deferred maintenance” warranted “an overall cap rate at the upper end of the range[.]” McFarland concluded “a capitalization rate of 10% appears appropriate.” (Ex. A at 82)
McFarland utilized loan terms from RealtyRates.com to develop capitalization rates utilizing the band of investment and debt coverage ratio methods (Ex. A at 82) McFarland concluded the band of investment method indicated a capitalization rate of 10.36% while the debt coverage ratio analysis indicated a capitalization rate of 9.41%. (Ex. A at 83) McFarland concluded the investor survey, band of investment method, and debt coverage ratio analysis indicated 10% capitalization rate for the subject property. (Ex. A at 83)
To account for property taxes, McFarland calculated an effective tax rate (ETR) of 3.22% by multiplying the tax rate (10.06%) by the assessment ratio (32%). McFarland added the ETR to the unloaded 10% capitalization rate to estimate an overall capitalization rate of 13.22%. (Ex. A at 83)
To estimate value, McFarland divided the NOI ($354,617) by the capitalization rate (0.1322) to calculate an estimated value of $2,682,633. (Ex. A at 84) McFarland concluded the foundation repairs, replacement of water damaged flooring, replacement of HVAC units, and replacement of three elevators due to “life safety issues” required immediate capital expenditures totaling $785,950. (Ex. A at 54) McFarland deducted the $785,950 in “deferred maintenance” from the initial value estimate of $2,682,633 to determine a “total indicated value” of $1,896,683, which was rounded to $1,900,000. (Ex. A at 84)
The deferred maintenance issues are documented in an addenda to Exhibit A denominated as “Exhibit D.” The HVAC maintenance issues are covered in a June 11, 2020, “Budgetary Proposal” from Peters-Eichler Mechanical. Peters-Eichler Mechanical proposed two items: (1) installation of a heating fin tube and pipe to the existing heating loop on three floors; and (2) the suggested addition of a condenser pump and increasing the pipe size from the chiller. The second item is proposed because the “[c]hiller will not run at 100% due to flow restrictions from the condenser.” The total cost of these two proposed items is $250,000. The Peters-Eichler proposal does not show the subject property’s HVAC was non-functional as of January 1, 2019.
The elevator issues are covered in a December 2019 “Modernization Budget” and “Capital Plan” proposed by ThyssenKrupp. The Capital Plan proposes “modernizing” two elevators by converting them from a geared system to a “gearless arrangement.” The purported benefits include increased efficiency and “increase[d] property value.” The proposed cost is $520,000. The ThyssenKrupp Capital Plan states “thyssenkrupp Elevator has not conducted a survey to assess the true scope of this work and this work can vary widely depending on current conditions.” The ThyssenKrupp proposal does not show the subject property’s elevators were non-functional as of January 1, 2019.
The total of the proposed HVAC repairs and elevator modernization is $770,000. The $785,950 in “deferred maintenance” alleged by Complainant can be calculated by adding an October 16, 2019, invoice for $15,950 in wall waterproofing work ($770,000 + $15,950 = $785,950). The addenda to Exhibit A also includes approximately $26,000 in receipts and invoices documenting the purchase of a sump pump, excavation, civil engineering consultation, and temporary fencing.
McFarland also developed a value estimate from the sales comparison approach. McFarland utilized four comparable properties, adjusted for differences, and determined an “indicated value” of $2,628,752. After deducting $785,950 in deferred maintenance, the resulting “total indicated value” of $1,842,802 was rounded to $1,850,000. (Ex. A. at 92) Although the income approach was given primary emphasis, McFarland concluded the income and sales comparison approaches were “mutually supportive” and showed that as of January 1, 2019, TVM of the subject property was $1,900,000. (Ex. A at 94)
- Respondent’s Evidence. Respondent submitted Exhibit 1, an appraisal prepared by Respondent’s staff appraiser, Ryan Brennan. Brennan concluded the TVM of the subject property as of January 1, 2019, was $3,600,000. (Ex. 1 at 2, 86) Brennan’s value estimate is based on the income and sales comparison approaches, with “the most weight” given to the income approach. (Ex. 1 at 86) Respondent introduced Exhibit 1 to support the BOE value, not to advocate a higher value.
Brennan considered nine comparable properties and the subject property’s office leases to conclude the market rent for the subject property’s office space was $14.50 per square foot as of January 1, 2019. This estimate of market rent is essentially the same as the subject’s actual average office space rental rate of $14.47 per square foot. (Ex. 1 at 48)
Brennan considered five comparable restaurant leases and four restaurant rental listings to estimate the market rent of the first floor restaurant space. Brennan concluded the $8.08 per square foot lease rate represented the “economic realities of the subject property and restaurant market” as of January 1, 2019. (Ex. 1 at 61)
Based on the estimated market rent of $14.50 per square foot for the subject’s office space and $8.08 for the restaurant space, Brennan calculated a potential gross rental income of $1,218,000; (75,717 square feet x $14.50) + (14,860 square feet x $8.08) = $1,217,964.80. (Ex. A at 66) Brennan added $14,400 of offsite parking income, $60,285 for tenant reimbursements, and $858 of miscellaneous income. He deducted 15% for vacancy and collection losses, $0.18 per square foot for replacement reserves, $7.00 per square foot for management expense, and $15,408 for a special Community Improvement District charge to estimate an NOI of $445,092. (Ex. 1 at 66)
Brennan estimated an unloaded, pre-tax capitalization rate of 9.1%. (Ex. 1 at 69) This estimate was based on survey data, band of investment, and capitalization rates from five comparable sales. (Ex. 1 at 66-68) The surveys included data specific to downtown St. Louis indicating that first quarter 2019 capitalization rates for office buildings ranged from 7.4% and 10%. (Ex. 1 at 66) To account for property taxes, Brennan calculated an effective tax rate (ETR) of 3.14%. Brennan added the ETR to the unloaded 9.1% capitalization rate to estimate an overall capitalization rate of 12.24%. (Ex. 1 at 69) To estimate value, Brennan divided the estimated NOI ($445,092) by the capitalization rate (0.1224), yielding an estimated value of $3,636,373.
Brennan also developed a value estimate from the sales comparison approach. Brennan utilized five comparable properties, adjusted for differences, and concluded the market value of the subject property is $45.00 per rentable square foot, yielding a TVM of $4,000,000 ($45 x 90,577 square feet = $4,075,965) (Ex. 1 at 84)
Brennan concluded the income approach yielded the best estimate of value because the subject property is an investment property. Accordingly, Brennan concluded “the market value as of January, 1, 2019, has been estimated to be $3,600,000.” (Ex. 1 at 86)
- Value. As determined by the BOE, the TVM of the subject property on January 1, 2019, was $2,392,000, with an assessed value of $765,500.
CONCLUSIONS OF LAW
- Assessment and Valuation. Commercial real property is assessed at 32% of its TVM as of January 1 of each odd-numbered year. Section 137.115.5(1)(c). “True value in money is the fair market value of the property on the valuation date, and is a function of its highest and best use, which is the use of the property which will produce the greatest return in the reasonably near future.” Snider v. Casino Aztar/Aztar Mo. Gaming Corp., 156 S.W.3d 341, 346 (Mo. banc 2005) (internal quotation omitted). The fair market value is “the price which the property would bring from a willing buyer when offered for sale by a willing seller.” Mo. Baptist Children’s Home v. State Tax Comm’n, 867 S.W.2d 510, 512 (Mo. banc 1993). “Determining the true value in money is an issue of fact for the STC.”
Cohen v. Bushmeyer, 251 S.W.3d 345, 348 (Mo. App. E.D. 2008). The “proper methods of valuation and assessment of property are delegated to the Commission.” Savage v. State Tax Comm’n, 722 S.W.2d 72, 75 (Mo. banc 1986).
“For purposes of levying property taxes, the value of real property is typically determined using one or more of three generally accepted approaches.” Snider, 156 S.W.3d at 346. The three generally accepted approaches are the cost approach, the income approach, and the comparable sales approach. Id. at 346-48; see also St. Louis Cty. v. Sec. Bonhomme, Inc., 558 S.W.2d 655, 659 (Mo. banc 1977).
“The income approach determines value by estimating the present worth of what an owner will likely receive in the future as income from the property.” Snider, 156 S.W.3d at 347. “This approach is most appropriate in valuing investment-type properties and is reliable when rental income, operating expenses and capitalization rates can reasonably be estimated from existing market conditions.” Id.
The comparable sales approach “is most appropriate when there is an active market for the type of property at issue such that sufficient data are available to make a comparative analysis.” Snider, 156 S.W.3d at 348. “The comparable sales approach uses prices paid for similar properties in arms-length transactions and adjusts those prices to account for differences between the properties.” Id. at 347-48 (internal quotation omitted). “Comparable sales consist of evidence of sales reasonably related in time and distance and involve land comparable in character.” Id. at 348.
- Evidence. The hearing officer is the finder of fact and determines the credibility and weight of the evidence. Kelly v. Mo. Dep’t of Soc. Servs., Family Support Div., 456 S.W.3d 107, 111 (Mo. App. W.D. 2015). The finder of fact in an administrative hearing determines the credibility and weight of expert testimony. Hornbeck v. Spectra Painting, Inc., 370 S.W.3d 624, 632 (Mo. banc 2012). The hearing officer “may inquire of the owner of the property or of any other party to the appeal regarding any matter or issue relevant to the valuation, subclassification or assessment of the property.” Section 138.430.2.
- Complainant’s Burden of Proof. The taxpayer bears the burden of proof and must show by a preponderance of the evidence that the property was misclassified or overvalued. Westwood P’ship v. Gogarty, 103 S.W.3d 152, 161 (Mo. App. E.D. 2003). The BOE’s valuation is presumptively correct. Tibbs v. Poplar Bluff Assocs. I, L.P., 599 S.W.3d 1, 7 (Mo. App. S.D. 2020). The “taxpayer may rebut this presumption by presenting substantial and persuasive evidence that the valuation is erroneous” and must prove “the value that should have been placed on the property.” Id. “Substantial evidence is that evidence which, if true, has probative force upon the issues, and from which the trier of fact can reasonably decide the case on the fact issues.” Savage, 722 S.W.2d at 77 (internal quotation omitted). Evidence is persuasive when it has “sufficient weight and probative value to convince the trier of fact.” Daly v. P.D. George Co., 77 S.W.3d 645, 651 (Mo. App. E.D. 2002); see also White v. Dir. of Revenue, 321 S.W.3d 298, 305 (Mo. banc 2010) (noting the burden of persuasion is the “party’s duty to convince the fact-finder to view the facts in a way that favors that party”).
- Complainant Did Not Prove Overvaluation. Complainant asserts the TVM of the subject property was $1,900,000 as of January 1, 2019. Complainant’s proposed value is unpersuasive for at least three reasons.
No Substantial and Persuasive Evidence of Deferred Maintenance
McFarland concluded that as of January 1, 2019, the subject property required HVAC, elevator, foundation, and flooring repairs necessitating an immediate capital expenditure of $785,790 that must be deducted from the initial value estimate of $2,682,633. (Ex. A at 54). Complainant did not produce substantial and persuasive evidence establishing the subject property suffered from deferred maintenance necessitating $785,790 in immediate capital expenditures as of January 1, 2019.
Appraisers distinguish “deferred maintenance” from “short-lived items.” Appraisal Institute, The Appraisal of Real Estate 271 (14th ed. 2013). “Deferred maintenance” refers to “items in need of immediate repair on the effective date of the appraisal” in order “for the building to continue to function as it should and to be marketable to potential buyers.” Id. at 618. Short-lived items, by contrast, “have not reached the end of their total useful life expectancy and are not completely deteriorated, but they are substantially depreciated in comparison with the overall structure.” Id. at 619. The distinction is crucial because “substantial deferred maintenance items typically require lump-sum adjustments in the sales comparison and income capitalization approaches.” Id. Short-lived items, by contrast, are typically accounted for by “replacement reserves” set aside to fund predictable, periodic replacement of building components. Id. at 485.
Regarding HVAC repairs, the Peters-Eichler Mechanical “Budgetary Proposal” proposed two actions. The first was installation of a heating fin tube and pipe to existing heating loop on three floors. The Budgetary Proposal does not indicate that installation of the heating fin tube is necessary. The second proposed action was the addition of a condenser pump and installation of a larger pipe from the chiller because the “[c]hiller will not run at 100% due to flow restrictions from the condenser.” The fact the chiller “will not run at 100%” implies the HVAC is functional, though less than optimally efficient. There is no evidence indicating the less than 100% efficient HVAC system required immediate repair so the building could continue to “function as it should” and remain “marketable to potential buyers.” Id. at 618. To the contrary, the fact occupancy remained above 85% after the valuation date indicates the building was both functional and marketable as of January 1, 2019, without the proposed HVAC repairs. There is no substantial and persuasive evidence showing the HVAC issues qualify as deferred maintenance justifying a lump-sum deduction from McFarland’s initial value estimate.
Regarding elevator upgrades, the ThyssenKrupp “Modernization Budget” and “Capital Plan” proposed “modernizing” two elevators by converting them from a geared system to a “gearless arrangement” for increased efficiency and “increase[d] property value.” Like the HVAC proposal, nothing in the ThyssenKrupp proposal indicates the elevators were in need of immediate repair or replacement in order for the building to be functional and marketable. The proposed “modernization” – with the stated goals of increased efficiency and property value – implies an elective capital investment, not an immediately necessary capital expenditure resulting from deferred maintenance.
McFarland also indicates the elevators present “life safety issues.” There is no evidence of any specific malfunction or that the subject property’s elevators failed to pass any state or locally mandated elevator inspections. See Section 701.350, et. seq.; 11 CSR 40-5.090. There is no substantial and persuasive evidence showing the elevators are an item of deferred maintenance warranting a lump-sum deduction from McFarland’s initial value estimate.
The remaining deferred maintenance items include an invoice for $15,950 in wall waterproofing work and approximately $26,000 in receipts and invoices documenting repairs and associated costs, for a total of approximately $42,000. Even if these items qualify as deferred maintenance, deducting $42,000 from McFarland’s initial value estimate of $2,682,633 yields total indicated value of $2,640,633, which exceeds the $2,392,000 value assigned by the BOE. An overvaluation claim necessarily fails when the BOE value is less than value indicated by the evidence.
The Alleged Deferred Maintenance is Double Counted
McFarland’s appraisal report double counts a portion of the alleged deferred maintenance. The deferred maintenance is first used as a justification for concluding the appropriate capitalization rate is 10% as opposed to the survey data indicating a capitalization rate “between 6.0% and 9.5% with an average of 8.0%.” (Ex. A at 82). Raising the capitalization rate to account for the additional risk posed by the alleged deferred maintenance discounts the initial value estimate. Despite the fact deferred maintenance is utilized to raise the capitalization rate and discount the initial value estimate, McFarland calculates the final value estimate by making a lump sum deduction for deferred maintenance from the already discounted initial value estimate. Using the alleged deferred maintenance to twice discount value further undermines Complainant’s proposed value $1,900,000.
The Capitalization Rate is Unpersuasive
Finally, Complainant’s estimated pre-tax capitalization rate of 10% is unpersuasive because it is based largely on investor surveys rather than comparable sales. Complainant’s appraisal report relies on a survey of properties “in the Midwest” with no specific reference to the downtown St. Louis office lease market. (Ex. A at 82) While the band of investment and debt coverage analysis in Complainant’s appraisal report states “we have surveyed the market and requirements of investors and lenders,” the only specific source cited is a “RealtyRates.com investor survey[.]” (Ex. A at 82)
“Deriving capitalization rates from comparable sales is the preferred technique when sufficient information about sales of similar, competitive properties is available.” The Appraisal of Real Estate 493. Surveys, on the other hand, “are generally used as support rather than as primary evidence of a capitalization rate.” Id. at 499. The persuasiveness of Complainant’s proposed 10% pre-tax capitalization rate is undermined because it is not based on “primary evidence” of a capitalization rate derived from comparable properties in the downtown St. Louis office lease market.
Complainant’s proposed 10% capitalization rate is further undermined because none of the investor survey results cited in McFarland’s appraisal report conclude a 10% capitalization rate is appropriate. The only investor survey cited indicates a capitalization rate for “‘2nd Tier’ properties in the Midwest range between 6.0% and 9.5% with an average of 8.0%.” (Ex. A at 82) Complainant’s proposed 10% capitalization rate is based on the conclusion that “deferred maintenance, limited available parking to tenants and high vacancy levels” pose an “additional risk” so that “an overall cap rate at the upper end of the range presented is indicated for the subject property.” (Ex. A. at 82) No market data is offered to support a capitalization rate exceeding the cited survey data. If, as McFarland assumes, the subject property is a “2nd Tier property,” then the surveyed “2nd Tier” properties presumably share a similar risk profile to the subject property. To the extent the survey data is probative, there is no persuasive evidence in the record supporting a capitalization rate exceeding both the 8% average and the 9.5% upper range noted in the investor survey. Complainant’s proposed 10% pre-tax capitalization rate is unpersuasive and further undermines the proposed value of $1,900,000.
Complainant did not produce substantial and persuasive evidence of overvaluation or of “the value that should have been placed on the property.” Tibbs, 599 S.W.3d at 7. Complainant’s overvaluation claim is denied.
CONCLUSION AND ORDER
The BOE’s decision is affirmed. The TVM of the subject property on January 1, 2019, was $2,392,000.
Application for Review
A party may file with the STC an application for review of this decision within 30 days of the mailing date set forth in the certificate of service for this decision. The application “shall contain specific detailed grounds upon which it is claimed the decision is erroneous.” Section 138.432. The application must be in writing, and may be mailed to the State Tax Commission of Missouri, P.O. Box 146, Jefferson City, MO 65102-0146, or emailed to Legal@stc.mo.gov. A copy of the application must be sent to each person 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.
The Collector of the City of St. Louis, and 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 the disputed taxes have been disbursed pursuant to a court order under the provisions of section 139.031.
STATE TAX COMMISSION OF MISSOURI
SO ORDERED April 9, 2021.
Eric S. Peterson
Senior Hearing Officer
State Tax Commission
Certificate of Service
I hereby certify that a copy of the foregoing has been electronically mailed and/or sent by U.S. Mail on April 9, 2021, to: Complainant(s) and/or Counsel for Complainant(s), the County Assessor and/or Counsel for Respondent and County Collector.
Contact Information for State Tax Commission:
Missouri State Tax Commission
421 East Dunklin Street
P.O. Box 146
Jefferson City, MO 65102-0146
 Complainant timely filed a complaint for review of assessment. The State Tax Commission (STC) has authority to hear and decide Complainant’s appeal. Mo. Const. art. X, sec. 14; section 138.430.1, RSMo 2000. All statutory citations are to RSMo 2000, as amended.
 All citations to Exhibit 1 and Exhibit 2 refer to the page number in the respective appraisal reports.
 All citations to written testimony refer to the numbered questions and answers.
 Including property taxes as an expense to estimate value presupposes value and begs the question posed by an ad valorem tax appraisal. For this reason, an appraiser performing an ad valorem appraisal does not deduct property taxes as an expense. Instead, the appraiser accounts for taxes in the capitalization rate by adding the ETR to the market cap rate to determine a “loaded” capitalization rate. Because value is estimated by dividing the NOI by the capitalization rate, the higher “loaded” capitalization rate accounts for the negative impact of taxes on value.
 Dividing $354,617 by 0.1322 yields $2,682,428, which is $205 less than the $2,682,633 value calculated in Exhibit A. This minor discrepancy is immaterial and likely results from rounding the underlying equation components.