GSA-VA St. Louis Property, LLC Steve Korenblat v. Michael Dauphin, Assessor, City of St. Louis

STATE TAX COMMISSION OF MISSOURI

GSA-VA ST LOUIS PROPERTY, LLC STEVE KORENBLAT,	)
Complainant,	)	Appeal No. 19-20119
	)
	)	Parcel No. 02210000350
v.	)
	)
MICHAEL DAUPHIN, ASSESSOR, CITY OF ST. LOUIS, MISSOURI,	)
Respondent.	)

 

ORDER AFFIRMING

HEARING OFFICER DECISION UPON APPLICATION FOR REVIEW 

HOLDING

 On April 9, 2021, State Tax Commission (STC) Senior Hearing Officer Eric S. Peterson (Hearing Officer) entered a Decision and Order (Decision) affirming the decision of the City of St. Louis Board of Equalization’s (BOE) finding the true value in money (TVM) of the subject property on January 1, 2019¹, was $4,160,625, classified as commercial, with an assessed value of $1,331,400. GSA-VA St. Louis Property, LLC Steve Korenblat (Complainant) subsequently filed a timely Application for Review of the Decision of the Hearing Officer. Michael Dauphin, Assessor, City of St. Louis, Missouri,

¹ Missouri operates on a two-year reassessment cycle for valuing real

property. See Section 137.115.1.  Absent new construction or improvements to a parcel of real property, the assessed value as of January 1 of the odd year remains the assessed value as of January 1 of the following even year. Id.

(Respondent) filed his Response to Complainant’s Application for Review.

We AFFIRM the Decision of the Hearing Officer. Segments of the Hearing Officer’s Decision may have been incorporated into our Order without further reference.

FINDINGS OF FACT AND PROCEDURAL HISTORY

 The subject property is located at 400 South 18^th Street in St. Louis, Missouri. The subject property is situated east of Union Station, west of the Enterprise Center, immediately north of a Metro light rail station, and near the proposed Major League Soccer stadium and in the Central Business District (CBD). The parcel/locator number is 02210000350. The subject property consists of 62,857 square feet of land improved by a four-story steel and masonry office building with approximately 124,588 square feet of net rentable area. The building was constructed in 1993 and configured for use by a single tenant. At the time of the evidentiary hearing, the building had been vacant since November 2016 or early 2017. The subject property includes 41 on-site parking spaces. Additional parking is available at a nearby off-site parking lot. The subject property was sold in 2002 for $14,200,000. On January 1, 2019, the subject property was listed for lease at $18 per square foot on a full lease basis.

Respondent valued the subject property at $4,160,625, as commercial property, as of January 1, 2019. The BOE valued the subject property at $4,160,625, as commercial property, as of January 1, 2019. Complainant filed a timely appeal with the STC, and the case proceeded to an evidentiary hearing.

At the evidentiary hearing, Complainant presented evidence in the form of exhibits and the testimony of Kenneth McFarland (Complainant’s Appraiser). Respondent presented evidence in the form of an exhibit and the testimony of Martin Hilgeman (Respondent’s Appraiser).

Complainant’s Appraiser estimated the TVM of the subject property as of January 1, 2019, was $1,410,000 based on the income approach and $1,310,000 based on the sales comparison approach, reconciled to a final value conclusion of $1,350,000. Complainant’s Appraiser concluded that the highest and best use of the subject property was to convert it to multi-tenant office space. Complainant’s Appraiser testified that the subject property was not in rentable condition on January 1, 2019, without curing existing deferred maintenance because the building had “significant roof leaks with water damage,” “the roof mounted HVAC units were shot,” “[s]ome of the floors had been actually removed,” and the building “probably was in need of some renovation.” Complainant’s Appraiser’s report also noted the need for repairs to the elevator. The total costs to cure the deferred maintenance were estimated at $767,960. Complainant’s appraiser testified that converting the subject to multi-tenant office space would result in a higher value than a residential apartment use or retail use due to the high costs required to retrofit the building.

Complainant’s appraisal report included a document labeled Exhibit C – Capital Expenditures, which contained estimates for replacement of the subject property’s roof and repairs to the subject property’s elevator. Exhibit C also contained an email that mentioned estimates for the replacement of the HVAC units.

The estimate for the roof replacement was dated July 27, 2017, and provided pricing for labor, materials, equipment, taxes, insurance, and supervision to remove the existing roof and install a new roof in the amount of $207,000 for a scope of work of approximately 343,000 square feet. Attached to the estimate was an email chain dated February 18, 2020, establishing that the estimate should have been based upon a scope of work of approximately 32,000 square feet. However, no corrected estimate for the roof replacement was included with Exhibit C. The record contains no evidence establishing the roof was replaced or repaired between the date printed on the estimate and the date of the evidentiary hearing. The same email chain stated that a quote for the “HVAC replacements” had estimated the cost at $576,000. However, the quote was not included with Exhibit C. The record contains no evidence establishing the HVAC units was replaced between the date of the email chain and the date of the evidentiary hearing. The estimate for the elevator repairs was dated October 9, 2019, and provided pricing for labor, materials, tools, and supervision to repair and return the elevator to service in the amount of $4,950. The record contains no evidence establishing the elevator was repaired between the date printed on the estimate and the date of the evidentiary hearing. Complainant asserted these replacements and repairs were necessary as a result of deferred maintenance, necessary for the continued functioning of the subject property.

Under the income approach, Complainant’s Appraiser “attempted to identify recent leases of properties that have some elements of comparability with the subject” but found “[n]o one lease is considered directly comparable with the subject.” Complainant’s Appraiser chose four buildings with recent lease dates ranging from January 2016 to October 2018. The base rent rates ranged from $11 to $17.50 per square foot. Three of the lease comparables were full service leases; one of the lease comparables was a modified gross lease. Two of the comparable leases were leased “as is,” one was leased with tenant finish at $42 per square foot, and one was leased with tenant finish at market level tenant improvement allowance. Three of the comparable leases were characterized as Class C buildings while one was a Class A building. Notably, two of the comparable leases were for landmark buildings in the City of St. Louis: the St. Louis Post-Dispatch building and the Power House Building, which became the location of the aquarium and observation ferris wheel attractions. The lease comparables were rated as either good or average quality. In his report, Complainant’s Appraiser described the market conditions of the comparable leases as “improving” from 2017 to 2018 and, therefore, applied an upward adjustment of 2% per year to each of the comparables. The report also described the subject property as being in “fair overall condition with a significant amount of deferred maintenance being noted” but that “upon completion of the roof replacement, replacement of the HVAC units, the elevator repairs and the interior renovations[,] the subject improvements will be in average overall condition.” Complainant’s Appraiser found three of the comparable leases to be inferior in terms of overall age and condition, warranting an upward adjustment, while the Peabody Plaza, the only comparable characterized as Class A, was “deemed to be similar in terms of overall age/condition to the subject property.” Adjustments also were made for lease terms, location, leased area/size, quality, parking adequacy, and lease term. The adjusted rent rates ranged from $16.34 to $16.87 per square foot.

Complainant’s Appraiser opined “that the market rent for the subject’s 124,588 square feet of office space, based on the completion of needed renovations and conversion to use as a multi-tenant office building space can be reasonably estimated at $16.75 per square foot.” The potential gross income (PGI) was calculated as $2,086,849 with no expense reimbursements. Estimated vacancy and collection loss was estimated at 10%, resulting in an effective gross income (EGI) of $1,878,164. After reviewing historical expenses for 2017 and 2018 and historical expenses from other comparable buildings and market averages, total expenses for the subject property were calculated at $835,113. This amount included $280,323 in repairs and maintenance and $24,918 in reserves. The projected net operating income (NOI) was $1,043,051. After applying an overall capitalization rate of 12.72%, Complainant’s Appraiser estimated the subject property’s value at $8,200,084. Given Complainant’s Appraiser’s analysis was based on the presumption that the subject property could be “retrofitted to support multi-tenant occupancy” and that the subject property had been vacant and required deferred maintenance repairs purportedly estimated at $778,950, Complainant’s Appraiser concluded “the present value of the estimated renovation costs, rent loss and lease up costs” that would be incurred in the first year would be $6,790,000. Complainant’s Appraiser deducted these costs from the value estimate of $8,200,084 to conclude a total indicated value of $1,410,080 (rounded).

Under the sales comparison approach, Complainant’s Appraiser analyzed five comparable properties that had sale dates occurring from December 2016 to September 2018. Three of the five comparable properties were located outside the CBD and wholly outside the City of St. Louis. The unadjusted sale prices of the comparables ranged from $5,501,125 to $19,000,000, which translated to a range of $56.37 to $110.67 per square foot. Complainant’s Appraiser testified that he had viewed the subject property and had made comparisons to the comparable properties as if the subject property had been repaired and retrofitted to obtain a stabilized occupancy. The adjusted price per square foot of the comparable properties ranged from $59.44 to $71.65. Complainant’s Appraiser opined that the market value of the subject property could be “reasonably represented at a unit value of $65.00 per square foot,” indicating a value of $8,098,220. Complainant’s Appraiser then deducted $6,790,000 for “the estimated renovation costs, rent loss and lease up costs” to conclude a total indicated value of $1,310,080 (rounded).

Complainant’s Appraiser reconciled the values indicated by the income approach and the sales comparison approach and estimated the TVM of the subject property was $1,3500,000 as of January 1, 2019.

Respondent’s Appraiser estimated the TVM of the subject property as of January 1, 2019, was $4,586,000, based on the sales comparison approach. Respondent’s Appraiser reasoned that the subject property’s “most probable future use would have involved some rehabilitation and conversion to a different use,” so he considered the income approach to be “speculative” and did not apply it. Respondent’s Appraiser concluded the highest and best use of the subject property was to convert it to a hotel or apartments.

Under the sales comparison approach, Respondent’s Appraiser analyzed three comparable properties that had sale dates occurring from January 2016 to July 2019. All three of the comparable properties were located in the downtown area of the City of St. Louis.    The unadjusted sale prices of the comparables ranged from $6,650,000 to $4,450,000, which translated to a range of $23.80 to $39.94 per square foot. Respondent’s

Appraiser testified that the comparable properties were similar to the subject property in that the comparables were “shell” buildings and that a purchaser of a shell building assumes most building components and systems will be replaced. Respondent’s Appraiser made only one adjustment to one comparable due to its size. The adjusted price per square foot of the comparable properties ranged from $29.75 to $39.94 with a median of $31.63 per square foot. Respondent’s Appraiser opined that a value of $32 per square foot for the subject property was appropriate considering the comparable sales. Respondent’s Appraiser did not deduct any amounts for the repairs and deferred maintenance. Respondent’s Appraiser concluded that the estimated value of the subject property $4,586,000 (rounded).

The Hearing Officer subsequently issued the Decision containing Findings of Fact and Conclusions of Law finding that Complainant had not presented substantial and persuasive evidence rebutting the presumption of correctness of the BOE’s determination of value. The Hearing Officer also found that the evidence did not support Complainant’s Appraiser’s highest and best use conclusion, i.e., that the highest and best use of the subject property was conversion to multi-tenant office space. The Hearing Officer also found that Respondent’s evidence regarding conversion to hotel or residential use was unpersuasive. The Hearing Officer concluded the TVM of the subject property was $4,160,625, as of January 1, 2019. Complainant filed a timely Application for Review. The STC thereafter issued its Order allowing the Application for Review and granting Respondent time to file a response. Respondent filed a response.

CONCLUSIONS OF LAW

Complainant’s Points on Review

 Complainant asserts the Hearing Officer’s Decision is erroneous, arbitrary, capricious, unreasonable, constitutes an abuse of discretion, and incorrectly applies Missouri law in that:

• Complainant proved by a preponderance of the evidence that Respondent significantly overvalued the subject property;
• The Hearing Officer held Complainant to a heightened burden of proof;
• The Hearing Officer held that Complainant’s appraiser was required to consider all conceivable uses of the subject property as part of his highest and best use analysis;
• The Hearing Officer overlooked or disregarded Complainant’s expert testimony and evidence regarding the highest and best use of the subject property;
• The Hearing Officer overlooked or disregarded Complainant’s expert testimony and evidence regarding the TVM of the subject property; and
• The Hearing Officer failed to make necessary findings regarding Complainant’s evidence of deferred maintenance cost or to deduct those costs from the TVM of the subject

Standard of Review

 A party subject to a decision and order of a hearing officer of the STC may file an application requesting the case be reviewed by the STC. Section 138.432. The STC may then summarily allow or deny the request. Section 138.432. The STC may affirm, modify, reverse, set aside, deny, or remand to the hearing officer the decision and order of the hearing officer on the basis of the evidence previously submitted or based on additional evidence taken before the STC. Section 138.432.

The Commission reviews the hearing officer’s decision and order de novo. Lebanon Properties I v. North, 66 S.W.3d 765, 770 (Mo. App. 2002); Union Electric Company, d/b/a Ameren Missouri, v. Estes, 2020 WL 3867672 (Mo. St. Tax Com., July 2, 2020); AT&T Mobility, LLC, v. Beverly Alden, Assessor, Caldwell County, Missouri, et al., 2020 WL 3867819 (Mo. St. Tax Com., July 2, 2020). “The extent of that review extends to credibility as well as questions of fact.” Lebanon Properties I, 66 S.W.3d at 770. The Commission “is free to consider all pertinent facts and estimates and give them such weight as reasonably they may be deemed entitled to.” St. Louis Cty. v. State Tax Comm’n, 515 S.W.2d 446, 450 (Mo. 1974).

Commission’s Ruling

 For the reasons that follow, the Commission finds Complainant’s arguments to be unpersuasive. The Commission, having reviewed the whole record and having considered the Hearing Officer’s Decision, the Application for Review of Complainant, and the Response of Respondent, affirms the Hearing Officer’s Decision.

There is a presumption of validity, good faith and correctness of assessment by the BOE. 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). This presumption is a rebuttable rather than a conclusive presumption. The presumption of correct assessment is rebutted when the taxpayer presents substantial and persuasive evidence to establish that the BOE’s assessment is erroneous and what assessment should have been placed on the property. Id.

The taxpayer in a STC appeal bears the burden of proof. The taxpayer is the moving party seeking affirmative relief. Therefore, Complainant bears the burden of proving by substantial and persuasive evidence 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. W.D. 1991). Substantial evidence can be defined as such relevant evidence that a reasonable mind might accept as adequate to support a conclusion. Cupples Hesse Corp. v. State Tax Commission, 329 S.W.2d 696, 702 (Mo. 1959). Persuasive evidence is evidence that has sufficient weight and probative value to convince the trier of fact. Cupples Hesse Corp., 329 S.W.2d at 702. 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).

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 Hearing Officer is the fact finder, and 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, 515 S.W.2d at 450; Chicago, Burlington & Quincy Railroad Company, 436 S.W.2d at 650.

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 or she 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).

Proper methods of valuation and assessment of property are delegated to the STC.

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, 564 S.W.2d at 896; 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., 854 S.W.2d at 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).

The taxpayer in a STC appeal bears the burden of proof. The taxpayer is the moving party seeking affirmative relief. A Hearing Officer sits as the trier of fact with discretion to weigh the evidence admitted into the record.   A Hearing Officer may consider the testimony of an expert witness and give it as much weight and credit as he or she may deem it entitled when viewed in connection with all other circumstances. A Hearing Officer is not bound by the opinions of experts who testify on the issue of reasonable value, but may believe all, some, or none of the expert’s testimony and accept it in part or reject it in part.

A Hearing Officer is not bound by appraisal industry standards; rather, he or she applies the law to the facts in evidence, weighing the evidence to determine which evidence is more persuasive.

Here, Complainant had the burden of proving that the BOE’s determination regarding the TVM of the subject property was erroneous and establishing the correct TVM to place upon the subject property. The Hearing Officer found that Complainant’s evidence of highest and best use of the subject property, conversion to multi-tenant office space, was ambiguous, that Complainant’s expert was not persuasive on this issue, and that the necessity of converting the subject property from single tenant to multi-tenant office space was “an unsupported assumption.” The Hearing Officer further found that Complainant’s value conclusions based upon the income approach and the sales comparison approach could not be accepted because those approaches were based on a faulty highest and best use conclusion. The record supports the Hearing Officer’s findings.

With regard to Complainant’s claim that the Hearing Officer failed to make necessary findings regarding deferred maintenance, we find Complainant’s claim to be without merit. Complainant submitted Exhibit C as an addendum to Complainant’s Appraiser’s report, which was admitted into evidence. Exhibit C purported to establish the costs to make specific repairs to the subject property: roof replacement, HVAC replacement, and elevator repair. Complainant’s Appraiser’s analysis and opinion of TVM was based, in part, on the presumption that the subject property had been vacant and required these repairs to continue to function, so Complainant’s appraiser deducted the costs shown in Exhibit C, approximately $778,950, from his initial value estimate for the subject property, $8,200,084.² However, Exhibit C did not provide substantial and persuasive evidence of these costs. First, Exhibit C included a bid for the roof replacement that was clearly incorrect and grossly overstated in terms of the scope of work and, therefore, incorrect and grossly overstated in its estimate of the cost. Further, the record contains no evidence establishing the roof was replaced or repaired between the date printed on the estimate and the date of the evidentiary hearing. Second, Exhibit C did not include any quote or bid for the HVAC replacement but merely a statement from a property manager that the cost had been estimated at $576,000. The record contains no evidence establishing the HVAC units was replaced between the date of the email chain and the date of the evidentiary hearing. Third, although Exhibit C included a formal bid for the repair of the elevator, the record is devoid of any evidence that the bid was accepted and the repair was either made or was scheduled to be made. “Deferred maintenance” refers to items in need of immediate repair on the effective date of the appraisal so that the building can continue to function as it should and can continue to be marketable to potential buyers. The record reveals that on January 1, 2019, the effective date of the appraisal, the subject property was listed for lease at $18 per square foot on a full lease basis.

The record supports the Hearing Officer’s findings. The Commission finds that a reasonable mind could have conscientiously reached the same result as the Hearing Officer based on a review of the entire record. Hermel, 564 S.W.2d at 895-96; Black v. Lombardi,

² Under the income approach, Complainant’s Appraiser concluded “the present value of the estimated renovation costs, rent loss and lease up costs” that would be incurred in the first year would be $6,790,000. Complainant’s Appraiser deducted these costs from the value estimate of

$8,200,084 to conclude a total indicated value of $1,410,080 (rounded).

970 S.W.2d 378 (Mo. App. E.D. 1998). The Hearing Officer did not err affirming the BOE’s valuation and finding the TVM of the subject property was $4,160,625, as of January 1, 2019.

ORDER

 The Decision of the Hearing Officer is AFFIRMED. Segments of the Hearing Officer’s Decision, including the findings of fact and conclusions of law therein, may have been incorporated into our Order without further 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 within 30 days of the mailing date set forth in the Certificate of Service for this Order.

If judicial review of this Order 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.

If no judicial review is made within 30 days, this Order is deemed final and the Collector of the City of St. Louis, 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 February 11, 2022.

STATE TAX COMMISSION OF MISSOURI

 

Gary Romine, Chairman

 

Victor Callahan, Commissioner

 

Will Kraus, Commissioner

 

Certificate of Service

I certify that copy of the foregoing has been sent electronically or mailed postage prepaid on February 11, 2022, to: Complainant(s) and/or Counsel for Complainant(s), the County Assessor and/or Counsel for Respondent and County Collector.

Elaina Mejia
Legal Coordinator

 

 

 

STATE TAX COMMISSION OF MISSOURI

GSA-VA ST LOUIS PROPERTY, LLC STEVE KORENBLAT,	)
Complainant,	)	Appeal No. 19-20119
	)
	)	Parcel No. 02210000350
v.	)
	)
MICHAEL DAUPHIN, ASSESSOR, CITY OF ST. LOUIS, MISSOURI	)
Respondent.	)
	)

 

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.³

Complainant appeared through counsel Patrick Keefe. Respondent appeared through counsel Chelsea Mannery. The evidentiary hearing was conducted at the St. Louis

³ 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.

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

1. The Subject Property. The subject property is located at 400 South 18^th 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 (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)

2. 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.

3. Complainant’s Evidence. Complainant submitted Exhibits A-C. Exhibit A is an appraisal report prepared by Kenneth McFarland, a licensed Missouri 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 4^th 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)⁴

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)

 

⁴ 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.

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)

4. Respondent’s 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,” Hilgeman concluded the highest and best use of the subject property would be conversion to hotel or residential use. (Ex. 1 at 30)

Hilgeman 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 1909	140,700 square feet; 11        stories;    poor condition	Sold for $4,450,000 on 6/27/2016.
Comparable 3	1221 Locust Ave.	Built 1925	137,692 square feet; 13        stories;    poor condition	Sold for $5,500,000 on 7/11/2019.

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)

5. 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

1. 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 ” 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.

2. 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.
3. 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 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”).

4.   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.⁵

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.

⁵ 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.

 

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

Disputed Taxes

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.

SO ORDERED April 9, 2021.
STATE TAX COMMISSION OF MISSOURI

 

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.

Elaina McKee
Legal Coordinator

 

 

Contact Information for State Tax Commission: Missouri State Tax Commission

421 East Dunklin Street

P.O. Box 146

Jefferson City, MO 65102-0146 573-751-2414

Fax 573-751-1341