Hampton Avenue Investments v. Bushmeyer (SLCY)

THE HAMPTON AVENUE INVESTMENT,)

Complainant,)

v.)               Appeal No.11-20302

ED BUSHMEYER, ASSESSOR,)

ST. LOUIS CITY, MISSOURI,)

Respondent.)

 

ORDER

SETTING ASIDE HEARING OFFICER DECISION

UPON APPLICATION FOR REVIEW 

On April 11, 2013, Hearing Officer Maureen Monaghan entered her Decision and Order (Decision) setting aside the assessment by the St. Louis City Board of Equalization and setting the true value in money for the property under appeal at $1,675,000.

Respondent filed his Application for Review of the Decision.^[1]Complainant filed its Response.^[2]By Order dated May 14, 2013, Respondent had been given until and including July 15, 2013, to file Reply.No Reply was filed.

CONCLUSIONS OF LAW

The Hearing Officer is not bound by any single formula, rule or method in determining true value in money, but is free to consider all pertinent facts and estimates and give them such weight as reasonably they may be deemed entitled.The relative weight to be accorded any relevant factor in a particular case is for the Hearing Officer to decide.^[3]

The Hearing Officer as the trier of fact may consider the testimony of an expert witness and give it as much weight and credit as he may deem it entitled to when viewed in connection with all other circumstances.The Hearing Officer is not bound by the opinions of experts who testify on the issue of reasonable value, but may believe all or none of the expert’s testimony and accept it in part or reject it in part.^[4]

The Commission will not lightly interfere with the Hearing Officer’s Decision and substitute its judgment on the credibility of witnesses and weight to be given the evidence for that of the Hearing Officer as the trier of fact.^[5]

GROUNDS FOR REVIEW

Respondent presents the following three grounds for his review:

A.    The findings of facts are in error since they do not mathematically support the dollar value arrived at in the Decisions and Order. 

B.    The tax value for the years 2011 and 2012 are the same despite the evidence of over two million dollars of improvements completed in 2011. 

C.    The Decision failed to properly apply the correct appraisal standards and past Missouri State Tax Commission Decisions. 

DECISION

The commission will address each of the points raised.

Allegation of Mathematical Errors

Respondent asserts the Findings of Fact are in error.Commission concurs with Respondent.Commission, using the findings of the Hearing Officer, makes the following calculations:

 

After correction to the findings of fact, the valuation indication for the property is $1,905,250.

Allegation of 2012 Valuation Error

Respondent argues that the Hearing Officer did not correctly value the Complainant’s property “with consideration of 137.115.1 RSMo.”Respondent’s argument is based on the claim “that the PIP (Product Improvement Plan) improvements were essentially completed before January 1^st of 2012 . . . .”Respondent argues that he “feels it is reasonable to expect a higher value for January 1^st, 2012, than January 1^st, 2011 due to the physical improvements and changes made and completed to the subject property during 2011.”

The evidence is that Holiday Inn required renovations to the subject property as a condition to keeping the franchise affiliation or Holiday Inn “flag.”^[6]The testimony of the Complainant’s expert was that the renovations did not begin until fourth quarter of 2011.However, Complainant’s exhibit indicates that the improvements began in 2010 and were completed in April, 2012.^[7]

The Hearing Officer made no findings that renovations completed on January 1, 2012, impacted the value of the hotel for 2012.Maintenance and improvements required by a franchise flag do not automatically equate to an increase in value.As stated by the Respondent’s appraiser, costs do not equal value.Hotel renovations are made to maintain occupancy rates and income.

The Commission recognizes that although the improvements may not impact the occupancy or revenue in the immediate future, the improvements will, at a minimum, impact the effective age of the property therefore lengthening its opportunity to produce income.The Respondent, however, did not present substantial and persuasive evidence to establish a different value in the even year to account for the improvements made in the first year of the assessment cycle.Therefore, Respondent’s second point is without merit.

Allegation of Appraisal Standards Error

Respondent’s final ground offered in support of his application for review is an allegation of failure to properly apply the correct appraisal standards to the case.Respondent failed to delineate what appraisal standards were allegedly not applied.The assertion is that the Hearing Officer “ignored the concept of using stabilized income after renovations are completed for 2012 tax year,” and that it was improper to use “the same occupancy rate of 52% for both 2011 and 2012 tax years.”The argument is without merit.

There is no credible evidence that income was not stabilized.The Hearing Officer clearly analyzed the historic and market income and expense information to develop a value using the Rushmore Approach.After analyzing this information, it was determined that using the hotel’s actual occupancy rate of 53% was appropriate.There was no finding that stabilized income was not used in the determination of true value in money, as Respondent erroneously suggests.

Furthermore, Respondent mischaracterizes the Hotel KCI case.^[8]The Hotel KCI case is inapposite because the Hearing Office, in the case, specifically found that the subject property was not yet stabilized and that the correct occupancy rate was the use of a market occupancy rate.^[9]Likewise, the Loop Hotels LLC case^[10] relied upon under this point by Respondent is not applicable.As Respondent notes correctly that the Loop Decision found that use industry data and stabilization of the income is appropriate to establish value.This was due to the fact that the hotel in Loop had only opened in 2009 and the case was valuing it for 2011.Therefore, there is limited historic income and expense information for the appraisers in that appeal to review.In contrast to the subject hotel, which has been in operation since 1973, there was ample historical date on income, expenses and vacancy rates upon which to construction the income approach.

In the present case, there is no credible evidence that income was not stabilized until the required renovations were completed in 2012, as claimed, but not supported by Respondent.The Hearing Officer made no such finding.The Hearing Officer did, in fact, analyze the appropriate information to determine that use of the hotel’s actual 2010 occupancy rate was appropriate.^[11]

Respondent failed to demonstrate that the Hearing Officer did not properly apply relevant appraisal standards.As concluded above, the Hearing Office is free to consider all pertinent facts and estimates and give them such weight as they may reasonably be deemed entitled, and the relative weight to be accorded any relevant factor in a particular case is for the Hearing Officer to decide.See, CONCLUSIONS OF LAW, supra.Respondent’s third ground for review fails to provide any basis upon which the Decision should be reversed or modified.It must accordingly, be affirmed.

Summary and Conclusion

A review of the record in the present appeal provides support for the determinations made by the Hearing Officer with the exception of the mathematical errors.There is competent and substantial evidence to establish a sufficient foundation for the Decision of the Hearing Officer.A reasonable mind could have conscientiously reached the same result based on a review of the entire record. The Commission finds no basis to support a determination that the Hearing Officer acted in an arbitrary or capricious manner or abused her discretion as the trier of fact and concluder of law in this appeal.^[12]

ORDER

The Commission upon review of the record and Decision in this appeal, finds grounds upon which the Decision of the Hearing Officer should be modified.The assessed value for the commercial property for tax year 2011 and 2012 is set at $609,680.

The Decision and Order of the hearing officer, including the findings of fact and conclusions of law therein, is incorporated by reference, as if set out in full, in this final decision of the Commission.

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

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

If no judicial review is made within thirty days, this decision and order is deemed final and the Collector of St. Louis City, 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 September 11, 2013.

STATE TAX COMMISSION OF MISSOURI

Bruce E. Davis, Chairman

Randy B. Holman, Commissioner

Victor Callahan, Commissioner

 

  

 

DECISION AND ORDER 

HOLDING 

Decision of the St. Louis City Board of Equalization sustaining the assessment made by the Assessor is SET ASIDE.Complainant presented substantial and persuasive evidence to rebut the presumption of correct assessment by the Board of Equalization and to establish the true value in money for the subject property as of January 1, 2011.

True value in money for the subject property for tax years 2011 and 2012 is set at $1,675,000, commercial assessed value of $536,000.

Complainant appeared by Counsel, Thomas Caradonna.Respondent appeared by Assistant City Counselor, Rich Kismer.

Case heard and decided by Hearing Officer Maureen Monaghan.

ISSUE

Complainant appeals, on the ground of overvaluation, the decision of the St. Louis City Board of Equalization, which sustained the valuation of the subject property.The Commission takes this appeal to determine the true value in money for the subject property on January 1, 2011.The Hearing Officer, having considered all of the competent evidence upon the whole record, enters the following Decision and Order.

FINDINGS OF FACT

1.Jurisdiction.Jurisdiction over this appeal is proper.Complainant timely appealed to the State Tax Commission from the decision of the St. Louis City Board of Equalization.

2.Evidentiary Hearing.The Evidentiary Hearing was held on March 4, 2013, in St. Louis City, Missouri.

3.Subject Property.The subject property is identified by locator number 4021-00-0095-00.The property is located at 5915 Wilson Avenue, St. Louis Missouri.The property consists of an approximate 3 acre tract improved by a 119 room hotel constructed in 1973.The hotel was undergoing renovations required by the franchise flag.The renovations began on the exterior in 2010.The interior renovations began in 2011 and completed in 2012.Since the new construction and improvements were not completed until after January 1, 2012, the assessed value for 2011 remains the assessed value for 2012.[13]

4.Assessment.The Assessor appraised the property at $4,224,063, a commercial assessed value of $1,351,700.The Board sustained the value.

5.Complainant’s Evidence.Complainant submitted the following exhibits:

 

The Exhibits were received into evidence prior to the hearing date.The Complainant also filed Rebuttal A, Property Improvement Plan, and Rebuttal B Written Direct Testimony of Witness Oldeg.The Exhibits were received into evidence.

Complainant’s evidence was substantial and persuasive to rebut the presumption of correct assessment by the Board.

6.Respondent’s Evidence.Respondent submitted the following Exhibits:

 

The Exhibits were received into evidence prior to the hearing date

7.The Income Approach is the most appropriate methodology for valuing hotels.The Rushmore approach is the preferred income approach methodology.

8.Historic and market income and expense information is necessary to develop a value using the Rushmore Approach.

 

9.The true value of the subject property on January 1, 2011, was $1,675,000.

CONCLUSIONS OF LAW AND DECISION

Jurisdiction

The Commission has jurisdiction to hear this appeal and correct any assessment which is shown to be unlawful, unfair, arbitrary or capricious.The hearing officer shall issue a decision and order affirming, modifying or reversing the determination of the board of equalization, and correcting any assessment which is unlawful, unfair, improper, arbitrary, or capricious. [14]

Basis of Assessment

The Constitution mandates that real property and tangible personal property be assessed at its value or such percentage of its value as may be fixed by law for each class and for each subclass.[15]By statute real and tangible personal property is assessed at set percentages of true value in money.[16]The constitutional mandate is to find the true value in money for the property under appeal.

Presumption In Appeals and Burden of Proof

There is a presumption of validity, good faith and correctness of assessment by the County Board of Equalization.[17]The presumption of correct assessment is rebutted when the taxpayer presents substantial and persuasive evidence to establish that the Board’s valuation is erroneous and what the fair market value should have been placed on the property.[18]

In order to prevail, Complainant must present an opinion of market value and substantial and persuasive evidence that the proposed value is indicative of the market value of the subject property on January 1, 2011.[19]There is no presumption that the taxpayer’s opinion is correct. The taxpayer in a Commission appeal still bears the burden of proof.The taxpayer is the moving party seeking affirmative relief.Therefore, the Complainant bears the burden of proving the vital elements of the case, i.e., the assessment was “unlawful, unfair, improper, arbitrary or capricious.”[20]

Substantial evidence can be defined as such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.[21]Persuasive evidence is that evidence which has sufficient weight and probative value to convince the trier of fact.The persuasiveness of evidence does not depend on the quantity or amount thereof but on its effect in inducing belief.[22]

Standard for Valuation

Section 137.115, RSMo, requires that property be assessed based upon its true value in money which is defined as the price a property would bring when offered for sale by one willing or desirous to sell and bought by one who is willing or desirous to purchase but who is not compelled to do so.[23]True value in money is defined in terms of value in exchange and not value in use.[24]It is the fair market value of the subject property on the valuation date.[25]Market value is the most probable price in terms of money which a property should bring in competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeable and assuming the price is not affected by undue stimulus.

Implicit in this definition are the consummation of a sale as of a specific date and the passing of title from seller to buyer under conditions whereby:

1.Buyer and seller are typically motivated. 

2.Both parties are well informed and well advised, and both acting in what they consider their own best interests. 

3.A reasonable time is allowed for exposure in the open market. 

4.Payment is made in cash or its equivalent. 

5.Financing, if any, is on terms generally available in the Community at the specified date and typical for the property type in its locale. 

6.The price represents a normal consideration for the property sold unaffected by special financing amounts and/or terms, services, fees, costs, or credits incurred in the transaction.[26]

Methods of Valuation

Proper methods of valuation and assessment of property are delegated to the Commission.It is within the purview of the Hearing Officer to determine the method of valuation to be adopted in a given case.[27]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.[28]

Weight to be Given Evidence

The Hearing Officer is not bound by any single formula, rule or method in determining true value in money, but is free to consider all pertinent facts and estimates and give them such weight as reasonably they may be deemed entitled.The relative weight to be accorded any relevant factor in a particular case is for the Hearing Officer to decide.[29]

The Hearing Officer as the trier of fact may consider the testimony of an expert witness and give it as much weight and credit as he may deem it entitled to when viewed in connection with all other circumstances.The Hearing Officer is not bound by the opinions of experts who testify on the issue of reasonable value, but may believe all or none of the expert’s testimony and accept it in part or reject it in part.[30]

The Rushmore Method (Income Approach is Most Appropriate)

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

Both appraisers developed the income approach.The Hearing Officer as the trier of fact may consider the testimony of an expert witness and give it as much weight and credit as he may deem it entitled to when viewed in connection with all other circumstances.The Hearing Officer is not bound by the opinions of experts who testify on the issue of reasonable value, but may believe all or none of the expert’s testimony and accept it in part or reject it in part.[31]

The methodology of valuation known as the Rushmore Approach is the valuation methodology for hotels.The Rushmore Approach has been recognized by state and federal courts, the Missouri State Tax Commission, and by hotel owners and assessors’ offices, as the most appropriate approach for valuing hotel properties.The valuation methodology was developed by Stephen Rushmore, MAI, FRICS, CHA.Mr. Rushmore wrote all five books for the Appraisal Institute on the valuation of hotels and motels.It has been the standard for valuation of hotels for over twenty years.

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

Both appraisers developed the Rushmore Approach.The appraisers formed opinions as to the income, expenses, and business and personal property components to be used to value the subject property.

Income:The Complainant’s appraiser reviewed the subject’s historical income data, the subject’s competition’s income information as well as the hotel industry to determine an appropriate income.There are 119 rooms.The history of the hotel indicates a high occupancy rate of 69.3% in 2007 followed by sharp decreases in occupancy in 2008 and 2009.The decrease in occupancy slowed in 2010 to 53%.Given the renovations underway in 2011, a buyer could anticipate that the occupancy rate would improve.Using the 2010 rate of 53% is appropriate.

Expenses:A review of expenses for the subject hotel indicates an expense rate of 71% is appropriate.

Business Component: Management and franchise flags are important to address the on-going issues of labor and marketing and these items also represent a portion of the income stream attributed to the business component.The appropriate handling of these items is to either deduct the expenses from the income before capitalizing the income to determine value OR determine the value of the property or then deduct the capitalized cost of the business components. The deduction accounts for the going concern business component thereby removing the business value from the value attributable to the real property.The Complainant’s appraiser reviewed the market and subject’s actual for an appropriate deduction for these items. The subject’s actual management fee is 5% of revenues.The franchise fee for the subject property is 5% of room revenue.The Complainant’s use of actual expenses for these components is appropriate.

Personal Property:With the personal property component of the valuation, the appraiser makes two deductions under the Rushmore approach.The first is for the value of the personal property currently in place and the second is for a reserve for replacing the property in order to remain competitive in the future.To account for the personal property currently in place, the appraiser may do either of two calculations.The appraiser may determine the value of the entire property and then deduct the market value of the personal property so that only the market value for the land and improvements remain.Alternatively, the appraiser could remove from the income stream, any income attributed to the FF&E.The appraiser would do this by multiplying the value of the FF&E by the capitalization rate and deducting it from the revenue.An appraiser could also deduct the value of the personal property after completing the income approach.The personal property value is determined using the personal property declaration amount of $406,787

The second deduction the appraiser must make is for the replacement of FF&E to maintain a competitive hotel.This is done with a reserve for replacement; the reserve for replacement is an expense item.The Complainant’s appraiser’s calculation of reserve for replacement on a per room basis with a 10 year life is appropriate ($178,000)

Cost Approach Not Applicable

For this appraisal problem, the cost approach is not appropriate due to the age, design of the subject and location.Buyers for the subject property would not rely on the cost approach to determine a purchase price.

Sales Comparison Approach Not Applicable

The sales comparison approach is generally recognized to be the best indicator to arrive at value when appraising owner occupied residential properties.Its usefulness in valuing hotel properties is questionable.Stephen Rushmore has observed, “ The sales comparison approach often provides highly supportable value estimates for homogeneous properties such as vacant land and single-family homes when the adjustments are few and relatively simple to compute.For larger, more complex properties such as … hotels, the required adjustments are often numerous and difficult to estimate.”[32]He goes on to note “… the sales comparison approach is seldom given substantial weight in a hotel appraisal, …”[33]Emphasis Added.Other experts in the field of valuation of hotels agree with Rushmore.They have concluded