STATE TAX COMMISSION OF MISSOURI
|GSA-VA ST LOUIS PROPERTY, LLC STEVE KORENBALT,||)|
|Complainant,||)||Appeal No. 19-20116|
|v.||)||Parcel No. 02210000350|
|MICHAEL DAUPHIN, ASSESSOR,||)|
|CITY OF ST. LOUIS, MISSOURI,||)|
DECISION AND ORDER
GSA-VA St. Louis Property, LLC Steve Korenblat (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 $4,160,625, with an assessed value of $1,331,400. Complainant alleges overvaluation and asserts the TVM of the subject property on January 1, 2019, was $1,350,000. 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 property is located at 400 South 18th Street in St. Louis, Missouri. The subject property is situated east of Union Station, west of the Enterprise Center and immediately north of a Metro light rail station. (Ex. A at 31)
The subject property consists of a 62,857 square foot lot improved with a four-story steel and masonry office building. The gross building area is between 128,000 and 144,000 square feet. (Ex. A at 15; Ex. 1 at 2) The net rentable area is 124,588 square feet. (Ex. A at 15) There are 41 on-site parking spots, with additional parking available at a nearby off-site parking lot. (Ex. A at 31) The building was constructed in 1993 and has been vacant since November 2016. (Ex. A at 15) The building is configured for use by a single tenant. The subject property sold for $14,200,000 in 2002. (Ex. 1 at 7)
- Assessment and Valuation. Respondent assessed the subject property as commercial property and determined the assessed value on January 1, 2019, was $1,331,400. The BOE affirmed Respondent’s assessment.
- Complainant’s Evidence. Complainant submitted Exhibits A-C. 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. Exhibit C was submitted to supplement the inadvertent omission of data from a comparable sale referenced in Exhibit A. Exhibit C shows that an office building located in downtown St. Louis at 200 N. Broadway sold on September 5, 2018, for $37.30 per square foot, or $19,000,000.
McFarland estimated the TVM of the subject property ln January 1, 2019, was $1,350,000 (Ex. A at 80) This value estimate is based on the income and sales comparison approaches. (Ex. A at 94) This value estimate is premised on the conclusion that the highest and best use of the subject property is conversion to multi-tenant office space.
McFarland’s highest and best use analysis considered four comparable land sales to estimate the land was worth $670,000 after deducting demolition costs. (Ex. A at 48) McFarland concluded the highest and best use of subject property as improved is conversion to multi-tenant office space because the estimated land value ($670,000) is less than the estimated value after conversion to multi-tenant office space ($1,350,000). (Ex. A at 48) McFarland’s highest and best use conclusion is premised on the proposition “[t]here is no alternative use which is capable of generating a higher income.” (Ex. A at 48) McFarland cites no market data or analysis of alternative uses to support the proposition that conversion to multi-tenant office space generates a higher income than any other alternative use.
McFarland’s income approach analysis is based on the assumption that conversion to multi-tenant office space is the highest and best use. McFarland considered four comparable properties to conclude the market rent for the subject property was $16.75 per square foot, yielding a potential gross rent of $2,086,849; (124,588 square feet x $16.75 = $2,086,849). (Ex. A at 60) McFarland deducted 10% for projected vacancy and collection loss. He also deducted market-based estimated expenses totaling $835,113 to project an estimated net operating income (NOI) of $1,043,051 ($2,086,849 x 0.9 – $835,113 = $1,043,051). (Ex. A at 61-64) McFarland assumed the renovations would make the subject property class B office space. (Ex. A at 60)
To account for lease-up costs including renovation, the acquisition of tenants, and interim vacancy, McFarland utilized “stabilization calculations” to reflect the effect of lease-up costs on value. The stabilization calculation also included a $30.00 per square foot tenant improvement allowance increased 3% annually over the assumed three-year absorption period, a 6% leasing commission, and a 10% discount rate to the budgeted cost of deferred maintenance, rent loss, and lease-up costs. (Ex. A at 65-66) McFarland also noted $778,950 in deferred maintenance for roof replacement, HVAC replacement, and elevator repairs. (Ex. A at 65) The stabilization calculation indicated the present value of the cost to convert the subject property to multi-tenant space was $6,790,000. (Ex. A at 66)
McFarland estimated an unloaded, pre-tax capitalization rate of 9.5%. (Ex. A at 69) This estimate was based on the capitalization rate of five comparable sales, investor surveys, the band of investment method, and a debt coverage ratio analysis. (Ex. A at 67-68)
Three of the five comparable sales involved property located in St. Louis County. (Ex. A at 67, 72-74) The other two comparable sales involved property located in downtown St. Louis. The cap rates ranged from 8% to 10.64%, with an average of 8.76%. (Ex. A at 67)
McFarland utilized survey data from the 4th Quarter 2018 Real Estate Research Corporation Real Estate Report (“Report”) and RealtyRates.com. (Ex. A at 67) The Report indicated capitalization rates ranged from 5.90% to 13.17% for properties in the St. Louis City Central Business District.
McFarland’s band of investment and debt coverage ratio analyses utilized Realty.Rates.com survey data and indicated capitalization rates of 9.44% and 9.29%. (Ex. A at 69) McFarland concluded a 9.5% capitalization was appropriate for the subject property. (Ex. A at 67, 69)
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 12.72%. (Ex. A at 69)
To estimate value, McFarland divided the estimated NOI ($1,043,051) by the capitalization rate (0.1272), yielding an estimated value of $8,200,084. (Ex. A at 70) McFarland then deducted $6,790,000 for deferred maintenance and lease up costs to estimate a total indicated value of $1,410,084, which was rounded to $1,410,000. (Ex. A at 70)
McFarland considered five properties in conjunction with his comparable sales approach analysis. (Ex. A at 71) Three of the five comparable sales involved property located in St. Louis County. (Ex. A at 72-74; Ex. C) One of the St. Louis County properties was in foreclosure and sold at auction. (Ex. A at 74) The unadjusted sales prices of the five properties ranged from $56.37 to $110.67 per square foot, with an average of $88.61 per square foot. The other two comparable sales involved property located in downtown St. Louis. McFarland concluded the comparable sales approach indicated a January 1, 2019, value of $1,310,000.
McFarland reconciled the values indicated by the income and sales comparison approaches by giving weight to both and concluding the estimated value of the subject property as of January 1, 2019, was $1,350,000. (Ex. A at 80)
- Respondent’s Evidence. Respondent submitted Exhibit 1, an appraisal prepared by Respondent’s staff appraiser, Martin Hilgeman. Hilgeman’s appraisal concluded the TVM of the subject property as of January 1, 2019, was $4,586,000. (Ex. 1 at 50)
To determine the highest and best use, Hilgeman noted subject property is near the Enterprise Center, Union Station, and the proposed Major League Soccer stadium. Given its location, and “the movement of developers to convert former office buildings and shell buildings into hotels and apartments,” Hilegeman concluded the highest and best use of the subject property would be conversion to hotel or residential use. (Ex. 1 at 30)
Hilegman used the sales comparison approach rather than the income approach. Hilgeman reasoned that because the subject property was vacant and would require rehabilitation and conversion to a different use, “the direct capitalization method is considered very speculative.” (Ex. 1 at 39)
Hilgeman utilized three comparable sales. (Ex. 1 at 42-45) Each sale involved a vacant “shell” building sold for conversion to another use. (Ex. 1 at 48) Hilgeman testified the subject property is similar to the comparable properties because the purchaser of a shell building assumes most building components and systems will be replaced. He testified the renovation costs for the subject property would be similar in cost to the renovation costs for the comparable properties. Hilgeman’s comparable sales are summarized below:
|Comparable 1||1706 Washington Ave.||Built 1912||279,450 square feet; nine stories; poor condition||Sold for $6,650,000 on 12/16/2016.
|Comparable 2||1501 Washington Ave.||Built
|140,700 square feet; 11 stories; poor condition||Sold for $4,450,000
|Comparable 3||1221 Locust Ave.||Built 1925||137,692 square feet;
13 stories; poor condition
|Sold for $5,500,000
Hilgeman adjusted the sale of 1706 Washington by 25% to account for size. There were no other adjustments to any of the comparables. (Ex. 1 at 48) The adjusted sale price per square foot ranged from $29.75 to $39.94, with a median of $31.63. (Ex. 1 at 50) Hilgeman concluded the comparable sales indicated the market value of the subject property was $32 per square foot, which equates to an estimated value of $4,586,000 ($32 ft2 x 143,316 ft.2 = $4,586,000 rounded). (Ex. 1 at 50)
- Value. As determined by the BOE, the TVM of the subject property on January 1, 2019, was $4,160,625, with an assessed value of $1,331,400.
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 348.1.
- 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 overvalued or misclassified. 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 on January 1, 2019, was $1,350,000. Complainant’s proposed value is premised on the assumption that the highest and best use of the subject property is conversion to multi-tenant office space. Complainant did not produce substantial and persuasive evidence supporting this assumption.
Identifying the highest and best use is the baseline premise for estimating value because all valuation approaches are applied with reference to a property’s highest and best use. See Snider, 156 S.W.3d at 346. The TVM “is a function of [the] highest and best use.” Id. Therefore, when applying the income approach, the value estimate must be based on “what a willing buyer would pay to realize the income stream that could be obtained from the property when devoted to its highest and best use.” Equitable Life Assur. Soc. of U.S./Marriott Hotels, Inc. v. State Tax Comm’n, 852 S.W.2d 376, 380 (Mo. App. E.D. 1993).
Complainant’s highest and best use analysis is unpersuasive for two principal reasons. First, Complainant produced no substantial and persuasive evidence showing conversion to a multi-tenant space is economically more viable than alternative uses. For instance, there is no evidence comparing the potential income that could be generated by converting the subject property to hotel or residential use. On cross-examination, Complainant’s counsel asked McFarland to identify the market data underlying the conclusion that the highest and best use of the subject property was conversion to multi-tenant office space. McFarland identified no market data supporting his conclusion. Absent such evidence, there is no persuasive basis in the record for concluding that conversion to multi-tenant office space is “the use of the property which will produce the greatest return in the reasonably near future.” Snider, 156 S.W.3d at 346 (internal quotation omitted). On this record, the highest and best use conclusion distills to an unsupported assumption.
Second, Complainant presented no evidence that similar vacant office buildings in downtown St. Louis have been bought for conversion multi-tenant office use. McFarland asserts there is “demand for small blocks of quality office space … within this submarket[,]” but provides no examples. (Ex. A at 47) Further, this assertion is inconsistent with the earlier assertion that office “vacancy levels within this submarket is still high.” (Ex. A at 33) While McFarland notes that the vacancy rates for Class B office space in the fourth quarter of 2018 was a relatively low 6.9%, the appraisal report also notes the “absorption rate” of vacant office space was also decreasing. The decreasing absorption rate in 2018 indicates lessening demand for office space as of January 1, 2019. McFarland also noted there is “120,000 square feet of office space currently under construction” in downtown St. Louis which may further increase vacancy rates and decrease rents. (Ex. A at 32) These general trends are, at best, ambiguous and do not establish the specific conclusion that highest and best use of the subject property is conversion to multi-tenant office space.
By contrast, Respondent’s appraiser noted the market trend in downtown St. Louis is to convert vacant, former office spaces to hotels and apartment buildings. He provided several specific examples. (Ex. 1 at 21-22) Respondent’s evidence that the trend is to convert vacant office space into hotel or residential use is substantial relative to Complainant’s unsupported assumption that the highest and best use of the subject is to convert it to multi-tenant office space.
Complainant did not produce substantial and persuasive evidence demonstrating the highest and best use of the subject property is conversion to multi-tenant office space. Complainant’s income approach and comparable sales approach analyses, therefore, are premised on an unpersuasive highest and best use assumption. Because the TVM “is a function of [the] highest and best use[,]” Snider, 156 S.W.3d at 346, Complainant’s unpersuasive highest and best use assumption undermines the ensuing value estimates. 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 $4,160,625, with an assessed value of $1,331,400.
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.
 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.
 Respondent’s appraiser, Hilegman, likewise provided no specific market data indicating conversion to residential or hotel use would yield the greatest return in the reasonably near future. Further, aside from the fact they were vacant, the comparable sales in Hilgeman’s report are not obviously comparable to the subject. Unlike the subject property, each of the three comparable sales are much older and more architecturally significant buildings located nearer to the downtown core. In any event, Complainant bears the burden of proof, not the Respondent. Thus, to the extent Respondent’s appraisal report is unpersuasive, that conclusion would not negate Complainant’s burden of producing substantial and persuasive evidence of overvaluation.