STATE TAX COMMISSION OF MISSOURI
| HILDEGARD PROPERTIES, LLC, | ) | |
| ) | ||
| Complainant, | ) | |
| ) | ||
| v. | ) | Appeal No. 17-34010 |
| )
) |
Parcel/locator No. 01-9.0-31.0-002-006.05A | |
| ROBERT S. BOYER, ASSESSOR, | ) | |
| JEFFERSON COUNTY, MISSOURI, | ) | |
| ) | ||
| Respondent. | ) |
DECISION AND ORDER
HOLDING
The assessment made by Robert S. Boyer, Assessor, Jefferson County, Missouri, (Respondent) is SET ASIDE. Hildegard Properties, LLC, (Complainant) presented substantial and persuasive evidence to establish that Complainant’s opinion of the subject property’s true value in money (TVM) as of January 1, 2017, was correct.
Complainant appeared by Counsel Patrick W. Keefe.
Respondent appeared by Counsel R. Scott Harness.
Appeal heard and decided by Senior Hearing Officer Amy S. Westermann (Hearing Officer).
ISSUE
Complainant appealed on the ground of overvaluation. Respondent initially set the TVM of the subject property at $3,337,000, classified as commercial property. Because Complainant’s purchase of the subject property closed on June 29, 2017, after the filing deadline for an appeal to the Jefferson County Board of Equalization had passed, Complainant filed the appeal directly with the State Tax Commission (STC). The STC takes this appeals to determine the TVM for the subject property as of January 1, 2017, under the economic conditions as they existed on January 1, 2017. The value as of January 1 of the odd numbered year remains the value as of January 1 of the following even numbered year unless there is new construction or improvement to the property. Section 137.115.1[1].
The Hearing Officer, having considered all of the competent evidence upon the whole record, enters the following Decision and Order.
FINDINGS OF FACT
- Jurisdiction. Jurisdiction over this appeals is proper. Complainant timely appealed to the STC.
- Evidentiary Hearing. The issue of overvaluation was presented at an evidentiary hearing on September 18, 2018, at the Jefferson County Government Administration Building in Hillsboro, Missouri.
- Identification of Subject Property. The subject property is identified as real property located at 3787 Vogel Road, Arnold, Missouri. It is further identified by parcel/locator number 01-9.0-31.0-002-006.05A.
- Description of Subject Property. The subject property consists of approximately 11.16 acres of real property classified as commercial and located within the City of Arnold. (Exhibit A; Exhibit 1) The City of Arnold is within Jefferson County but adjacent to and just south of the St. Louis County line. (Exhibit A) The subject property is located at a signalized intersection of arterial roads and has 445 linear feet of frontage along one of the roads. (Exhibit A) The site is improved by a retail commercial community shopping center built in 2004-2005. (Exhibit A; Exhibit 1) The improvements consists of two, one-story masonry retail buildings with seven tenant suites and asphalt-paved surface parking lots for approximately 411 vehicles. The two buildings have a combined total of 42,091 square feet of gross and net rentable area. (Exhibit A; Exhibit 1) The construction is of average quality, and the site is zoned C3, commercial business use. (Exhibit A; Exhibit 1) The subject property was “spun off” from a larger shopping center and sold to Complainant on June 29, 2017, for $1,000,000. (Exhibit A)
- Assessment. Respondent set a TVM of the subject property at $3,337,000, as of January 1, 2017, classified as commercial.
- Board of Equalization. Complainant’s purchase of the subject property closed on June 29, 2017, after the filing deadline for an appeal to the Jefferson County Board of Equalization had passed; therefore, Complainant filed the appeal directly with the STC.
- Complainant’s Evidence. Complainant opined the subject property had a TVM of $2,000,000 as of January 1, 2017. To support its opinion of value, Complainant offered the following exhibits:
| Exhibit | Description |
| A | Appraisal Report of Russell J. Lauer |
| B | Written Direct Testimony of Russell J. Lauer |
According to Exhibit A, the subject property had been marketed for sale at a “negotiable” asking price. At the time of sale to Complainant, the subject property had two major tenants, and there was concern that either or both might close. Three smaller spaces within the subject property were vacant. The subject property suffered from deferred maintenance, required a new roof, façade repairs, retaining wall repairs, and parking lot repairs. Since the acquisition in June 2017, Complainant had spent approximately $648,587 to correct the deferred maintenance. As of the date of the appraisal in 2018, Complainant planned on spending an additional $85,000 on asphalt paving and HVAC in 2018 and planned on making additional repairs in 2019. The total cost to cure the deferred maintenance was $733,587. As of January 1, 2017, the subject property was considered to be in “below average condition” due to the deferred maintenance. (Exhibit A)
The appraisal report developed the income approach and the sales comparison approach. The two approaches were reconciled and indicated a TVM of $2,000,000 as of January 1, 2017; however, the appraisal report placed the greatest weight on the income approach. The cost approach was not developed because of the age of the improvements and the estimate of all forms of depreciation attributable to the subject property would be too large and subjective in order to provide a reliable indication of value. (Exhibit A)
Income Approach
According to the rent roll as of January 1, 2017, the subject property had a total of 42,091 square feet of rentable space and a total of 37,851 square feet of space actually rented; a total of 4,240 square feet, approximately 10% of the total rentable space, was vacant. (Exhibit A) The annual base rent of the space actually rented was $397,040. The historical income and expenses for the subject property prior to July 2017 were not provided. The historical income and expenses for July to December 2017 and January to February 2018 were provided along with the 2018 budgeted income and expenses. (Exhibit A)
When Complainant purchased the subject property, an Operation and Easement Agreement (OEA) between the larger shopping center and the subject property was transferred to Complainant. Complainant became responsible for common area maintenance (CAM), and Target and Home Depot, stores which occupy the larger shopping center, make annual payments to Complainant for their share of the CAM. The total budgeted CAM for 2018 was $398,319. Under the OEA, Complainant’s actual expense for CAM was $158,311. (Exhibit A)
The appraisal report conducted a survey of four comparable rental spaces in Arnold, Jefferson County, to determine the market rent. (Exhibit A) The rents of the comparables ranged from $12.63 SF to $19.00 SF based on triple net basis or an adjusted triple net basis. The average rent rate was $15.66 SF. The comparable rental spaces were rented from January 2013 to August 2015. After market-based adjustments for time, location/visibility/access, age/condition, and anchor tenant were applied, the adjusted rents ranged from $14.25 SF to $15.96 SF with an average adjusted rent of $15 SF. (Exhibit A) The appraisal report reasoned that the subject property contained rental spaces of varying square footage and that larger spaces typically rent for a lower rate per square foot versus a smaller suite and therefore made a downward adjustment of 10% for one of the subject property’s tenants located in a space smaller than another tenant’s space. (Exhibit A)
The appraisal report calculated the following income, expenses, net operating income, and capitalization rate:
| Income | |
| Potential Gross Rent | $493,171 |
| Other Income – Expense Reimbursements | +$113,488 |
| Potential Gross Income | $606,659 |
| Average Vacancy and Collection Loss (from Co-Star, Gershman, and Colliers International 2016 surveys) | -$30,333 (4.1% + 1% to adjust for actual vacancy) |
| Adjusted Potential Gross Income | $576,326 |
| CAM Payment Received | +$240,008 |
| Effective Gross Income | $816,334 |
| Expenses[2] | |
| Management Fee | $26,000 |
| Administrative | +$4,000 |
| Insurance | +$9,350 |
| Real Estate Tax | +n/a |
| Repairs and Maintenance | +$29,000 |
| Repairs and Maintenance – Capital Improvements | +n/a |
| Cleaning | +$2,500 |
| Utilities | +$19,000 |
| Landscaping/Parking Lot Maintenance | +$43,000 |
| Security System | +$5,550 |
| Shared CAM | +$300,093 |
| Reserve for Replacement | +$10,525 |
| Total Operating Expenses | $449,018 |
| Net Operating Income (NOI) | |
| Effective Gross Income | $816,334 |
| Total Operating Expenses | -$449,018 |
| NOI | $367,316 |
The appraisal report used information from investment and commercial brokers and published resources such as RealtyRates.com and the 4th Quarter 2016 Real Estate Research Corporation Real Estate Report to estimate a capitalization rate ranging from 10.0% to 11.0%. (Exhibit A) The appraisal report also researched loan terms available from investors and lenders to estimate a rounded capitalization rate of 9.80%. (Exhibit A) After considering the risk associated with the subject property, the appraisal report concluded a capitalization rate of 10.50% and an overall rate of 10.62%. (Id.) The appraisal report calculated a retrospective value indication for the subject property as follows:
| Estimated NOI | $367,316 |
| Capitalized at 10.62% | $3,458,719 |
| Less: Renovations (Cost to Cure) | ($733,587) |
| Less: Tenant Stabilization | ($403,383) |
| Less: Developer Profit | ($320,546) |
| Total | $2,001,203 |
| Rounded to: | $2,000,000 |
Sales Comparison Approach
The appraisal report compared four comparable properties located in Jefferson County and St. Louis County. The comparable properties sold between November 2012 and August 2015 with sale prices ranging from $780,000 to $3,650,000. (Exhibit A) These sale prices translated to $78.06 SF to $119.88 SF. The appraisal report designated Comparable No. 2 as an outlier because it was primarily an office building. After making market-based adjustments for location, size, parking, and whether the comparables were “anchored” with a tenant, the adjusted sale prices of Comparable Nos. 1, 3, and 4 ranged from $80.17 SF to $85.72 SF, averaging $82.30 SF. The final indication of value under the sales comparison approach was then calculated as follows:
| 42,091 square feet @ $82.30 | $3,464,089 |
| Less: Renovations (Cost to Cure) | ($733,587) |
| Less: Tenant Stabilization | ($403,383) |
| Less: Developer Profit | ($320,546) |
| Total | $2,006,573 |
| Rounded to: | $2,000,000 |
Other Evidence
Complainant also offered the testimony of certified real estate appraiser Russell J. Lauer (Lauer). Lauer is the president of Lauer Appraisal Company in St. Louis. (Exhibit B) Lauer holds a Bachelor of Science degree in Business Administration and a Master’s degree in Business Administration. Lauer has completed numerous real estate and real estate valuation courses through the Appraisal Institute and the St. Louis Real Estate Board. Lauer has been a real estate appraiser since 1986, more than 30 years. (Id.) He also is a member and past president of the St. Louis Chapter of the Appraisal Institute; a panelist on the Appraisal Institute’s Regional Ethics and Counseling Panel; a Missouri licensed real estate broker; and a member of the St. Louis Metro Real Estate Board. (Id.) Lauer’s geographic appraisal experience includes Missouri, Illinois, Texas, Indiana, Tennessee, Ohio, Oregon, and North Dakota. (Id.)
Lauer testified that he personally inspected the subject property and examined documentation and information relevant to valuing the property in order to prepare his appraisal report. Lauer testified that he used the income capitalization approach and the sales comparison approach to valuing the subject property. (Exhibit B) Lauer testified that he placed the most weight on the income capitalization approach because the approach “contains the kind of analysis that a buyer would ordinarily use.” Lauer testified that the sales comparison approach supported his conclusion of TVM. Lauer testified that he did not use the cost approach to value the subject property because of the age of the improvements, which would require an estimate for depreciation that would be too large and too subjective to provide a meaningful indication of value. (Id.)
On cross examination, Lauer testified that the appraisal report documented a discussion with Kyle Steiner (Steiner) of Jones Lang LaSalle regarding Complainant’s purchase of the subject property. Steiner was the purchasing broker for Complainant. During the due diligence period prior to the closing of the sale, Steiner discovered that a considerable amount of deferred maintenance existed and that the major tenant, a fitness club, Xist Fitness, was at high risk of closure due to criminal indictments filed against the owner of the fitness club. Steiner informed Lauer that the purchase price of $1,000,000 was based on the assumption that the fitness club would close. At the time of sale, the fitness club leased 21,767 square feet and generated 60% of the base rent of the subject property. Lauer testified that he did not have personal knowledge of whether the fitness club was late on its rent or at risk of going out of business or of vacating the premises. Lauer testified that the lease for the fitness club ran with the land.
On further cross examination, Lauer testified that he did not include a deferred maintenance adjustment in the comparable sales adjustment grid of his appraisal report because the deferred maintenance issues had been addressed since the date of purchase. Lauer testified that as of January 1, 2017, some of the subject property’s tenants were paying back rent.
On re-direct examination, Lauer testified that the fitness club was a large tenant but that he had found no evidence of a completed transaction where the business had been sold to a new owner. With regard to tenant issues, Lauer testified that the creditworthiness of tenants would be important to a landlord. Lauer further testified that if the two major tenants of the subject property were to vacate, the subject property would be 72% vacant. Lauer testified that it was public knowledge that the owner of the fitness club went to jail and that this information would affect investors’ willingness to purchase the subject property. Lauer further testified that he believed the tenant issues and the deferred maintenance issues impacted Complainant’s purchase price.
On re-cross examination, Lauer testified that the appraisal report was based on market transactions. Lauer testified that he had no knowledge of whether the fitness club had a new chief operations officer as of December 2016, prior to the relevant tax date.
- Respondent’s Evidence. Respondent opined the subject property had a TVM of $3,350,000 as of January 1, 2017. To support his opinion of value, Respondent offered the following exhibits:
| Exhibit | Description |
| 1 | Appraisal Report of Charles J. Flecke |
| 2 | Written Direct Testimony of Charles J. Flecke |
The appraisal report developed the income approach, the sales comparison approach, and the cost approach. The three approaches were reconciled and indicated a TVM of $3,350,000 as of January 1, 2017; however, the appraisal report placed the greatest weight on the sales comparison approach. (Exhibit A)
Income Approach
The appraisal report conducted a survey of four comparable rental spaces in St. Louis County to determine the market rent. (Exhibit 1) The rents of the comparables ranged on average from $8.05 SF to $12.00 SF based “on a net basis for the income potential and based upon the tenant paying most of the expenses.” (Exhibit 1) The appraisal report noted that:
Rental rates for similar commercial rental units range from $9.00 to $15.00/Sq Ft nnn for retail commercial type properties within the immediate area of the subject. These figures depend on remodeled property condition(s), location, visibility, access, age and size. Currently the subject is multi-tenant occupied and has approximately 37,741 +/- sq ft currently leased and 7,124 +/- Sq Ft available % leased 83.1% . . . . Asking rental rate is $14.00/Sq Ft nnn.
(Exhibit 1) The comparable rental spaces were rented from start dates that began as long ago as January 2012 (four-year lease) and as recently as November 2016 (five-year lease).
Without providing any data derived from the subject property’s actual income and expenses, the appraisal report made the following calculations:
Potential Gross Income:
Retail Neighborhood SC use 42,091 sf @ $12.50/sf = $526,138/yr
Less vacancy/credit loss @15% = $-78,921/yr
Effective Gross Income: =$447,227/yr
Operating Expenses – Net Basis
Taxes 18.73% of EGI: ($2.00/sf) =$ 83,776/yr
Reserves for Replacement @ 0.500% of EGI: ($.53/sf) =$ 22,361/yr
Non-reimbursed expenses @ 15.00% of EGI: ($1.60/sf) =$ 67,083/yr
Overall Operating Expenses: 38.73% ($4.13/sf) =$173,220/yr
Net Operating Income $273,997/yr
Net Operating Income/NOI: ($ 7.65./Sf) =$273,997/yr
Capitalized Rate 8.45%
Capitalized Value $3,242,568
Indicated Value by Income Approach: Say $3,243,000
Indicated Value per Square Foot: $3,243,000/42,091 SF = $77.05 SF
(Exhibit 1) To determine the capitalization rate, the appraisal report used the mortgage-equity method “based on the actions of investors in the marketplace”:
Loan Constant 25 Years @ 7.50% 0.0886789
Mortgage 0.80 x 0.08689 = 0.06951
Equity Yield 0.20 x 0.07500 = 0.01500
0.08451
Overall Rate: Say 8.45%
Sales Comparison Approach
The appraisal report compared three comparable properties located in St. Louis County. The comparable properties sold between February 2015 and November 2016 with sale prices ranging from $2,175,000 to $2,689,221. (Exhibit 1) These sale prices translated to $77.13 SF to $109.54 SF. The appraisal report noted that the occupancy rates of the comparables at the time of sale were 85%, 100%, and 97%, respectively. The appraisal report also noted that the market-based adjustments “considered relevant in this analysis included” location, size, age, condition, design, utility, finish, land-to-building ratio, and access; however, the appraisal report did not include a grid in which specific adjustments were applied to each comparable property. The appraisal report applied an adjusted price per square foot of $80 to the subject property as follows:
Sold Range:
High: 42,091 +/- SF @ $109.54 sq ft = $4,610,648
Low: 42,091 +/- SF @ $ 77.13 sq ft = $3,246,479
Subjects (sic) square foot area: 42,091 +/- SF @ $80.00/sq ft = $3,367,280
Indicated Market Value by Market Approach: Say $3,367,000
(Exhibit 1)
Cost Approach
The cost approach was given less weight than the other approaches because this method of determining a TVM uses current costs based on estimates from contractors and then applies the estimates to an older structure. Given that the subject property’s improvements were “somewhat older,” the appraisal report found this method a less reliable indicator of value. After calculating amounts for replacement costs, depreciation, and land value, the appraisal report estimated a rounded value of $3,455,000, or $82.08 SF. (Exhibit 1)
Other Evidence
Respondent also offered the testimony of certified real estate appraiser Charles J. Flecke (Flecke). Flecke is a deputy assessor for the St. Louis County Assessor’s Office. (Exhibits 1 and 2) Flecke holds a Bachelor of Science degree in Business Administration. Flecke has completed numerous real estate valuation courses through the American Institute of Real Estate Appraisers, the Appraisal Institute, and other organizations. Flecke has been a real estate appraiser since 1986, more than 30 years. (Id.) He also is a member of the St. Louis International Association of Assessing Officers, the St. Louis Board of Realtors, and the Missouri Historical Preservation Society. (Id.)
Flecke testified that he made site visits to the subject property to collect data and photographs of the subject property in order to prepare his appraisal report. Flecke testified that he also obtained information about the subject property from “[p]ublic files, personal data files, CoStar, Loopnet, and a collection of similar types of appraisals performed by others.” (Exhibit 2) Flecke testified that he used the cost approach, the income approach, and the sales comparison approach to valuing the subject property. (Exhibit 2) Flecke testified that he reconciled the three approaches and concluded a weighted average, giving the most weight to the sales comparison approach.
On cross examination, Flecke testified that he had inspected the subject property on May 18, 2018, and June 20, 2018. Flecke testified that he relied upon a property condition report provided by TerraCon dated April 28, 2017, near the date of sale. Flecke included the TerraCon report in Exhibit 1. Flecke testified that the TerraCon report was a good indicator of the subject property’s condition on January 1, 2017. Flecke testified that he could see 80% to 85% of the building during site visits and that the building seemed to be in average condition, not poor or fair condition. Flecke was aware of some deferred maintenance repairs conducted after Complainant purchased the subject property. Flecke saw a roof crew and equipment on the roof during one of his visits. Flecke testified that he did not get onto the roof but acknowledged that he could have arranged for someone to meet him to provide access to the roof. Flecke acknowledged that the asphalt probably was repaired in early 2018. Flecke acknowledged that he could not confirm whether the air handling units inside the subject property had been replaced. Flecke did not dispute that the subject property had normal wear and tear but disputed some of the costs of deferred maintenance, which he believed should have been characterized as wear and tear. According to Flecke, the costs for roof repair and asphalt repair were not included in Complainant’s income and expense statements. Flecke testified that the TerraCon report contained a replacement reserve cost table with estimates for the costs of deferred maintenance, which exceeded Complainant’s purchase price for the subject property.
On further cross examination, Flecke testified that the subject property is situated below grade along an arterial road and that one cannot see the roof of the building from the road. Flecke testified that his research of the sales history and ownership of the subject property showed Complainant’s purchase on June 29, 2017, was not an arms-length transaction because the $1,000,000 purchase price was too low. Flecke testified that he knew the land price alone would be approximately $1,000,000. Flecke testified that the price for the subject property was far below the market value of any of the properties he reviewed in the sales comparison approach, especially considering the subject property was 80% occupied. Flecke testified that research into the tenants of the subject property was provided by CoStar, an authoritative source used by appraisers. CoStar provided the current rent roll and researched the leases for the subject property. Flecke testified that he confirmed one of the tenants, a pizza restaurant, was in arrears and had trouble keeping up with rent payments. Flecke testified that another tenant, the fitness club, Xist Fitness, had a problem with the club’s ownership and operation of the club.
On re-direct examination, Flecke testified that he had not made any adjustment to value based on the tenants because he would need to do so based on individual tenants, who likely would not provide the information necessary to make such an adjustment. Flecke testified that he did not use comparable properties in Jefferson County because he was looking at characteristics of comparable properties and the type of shoppers who visited the subject property and the comparable properties. Flecke testified that he used a market-derived capitalization rate for the income approach and that he did not create an adjustment grid for the sales comparison approach because his analysis was qualitative.
- TVM Established. Complainant’s exhibits and evidence were substantial and persuasive to establish that the correct TVM of the subject property was $2,000,000 as of January 1, 2017.
CONCLUSIONS OF LAW AND DECISION
Jurisdiction
The STC has jurisdiction to hear this appeal and correct any assessment which is shown to be unlawful, unfair, arbitrary, or capricious, including the application of any abatement. The Hearing Officer shall issue a decision and order affirming, modifying or reversing the determination of the BOE, and correcting any assessment which is unlawful, unfair, improper, arbitrary, or capricious. Article X, Section 14, Mo. Const. of 1945; Sections 138.430, 138.431, 138.431.4.
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. Article X, Sections 4(a) and 4(b), Mo. Const. of 1945. The constitutional mandate is to find the TVM for the property under appeal. By statute, real property and tangible personal property are assessed at set percentages of TVM: residential property at 19%; commercial property at 32%; and agricultural property at 12%. Section 137.115.5.
Burden of Proof
To obtain a reduction in assessed valuation based upon an alleged overvaluation, the Complainant must prove the true value in money of the subject property on the subject tax day. Hermel, Inc., v. State Tax Commission, 564 S.W.2d 888, 897 (Mo. banc 1978). True value in money is defined as the price that the subject property would bring when offered for sale by one willing but not obligated to sell it and bought by one willing or desirous to purchase but not compelled to do so. Rinehart v. Bateman, 363 S.W.3d 357, 365 (Mo. App. W.D. 2012); Cohen v. Bushmeyer, 251 S.W.3d 345, 348 (Mo. App. E.D. 2008); Greene County v. Hermel, Inc., 511 S.W.2d 762, 771 (Mo. 1974). True value in money is defined in terms of value in exchange and not in terms of value in use. Stephen & Stephen Properties, Inc. v. State Tax Commission, 499 S.W.2d 798, 801-803 (Mo. 1973). In sum, true value in money is the fair market value of the subject property on the valuation date. Hermel, Inc., 564 S.W.2d at 897.
“’True value’ is never an absolute figure, but is merely an estimate of the fair market value on the valuation date.” Drury Chesterfield, Inc., v. Muehlheausler, 347 S.W.3d 107, 112 (Mo. App. E.D. 2011), citing St. Joe Minerals Corp. v. State Tax Comm’n of Mo., 854 S.W.2d 526, 529 (Mo. App. E.D. 1993). “Fair market value typically is defined as the price which the property would bring when offered for sale by a willing seller who is not obligated to sell, and purchased by a willing buyer who is not compelled to buy.” Drury Chesterfield, Inc., 347 S.W.3d at 112 (quotation omitted).
There is no presumption that the taxpayer’s opinion is correct. The taxpayer in a STC 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.” Westwood Partnership, 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).
In the present appeal, Respondent valued the subject property as of January 1, 2017. Complainant purchased the subject property after the valuation date and after the deadline for filing an appeal with BOE had passed. Complainant is now seeking to lower Respondent’s valuation. Accordingly, Complainant must present substantial and persuasive evidence to establish the TVM should have been placed on the property.
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). See also, 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).
Respondent’s Burden of Proof
Respondent, when advocating a value different from that determined by the original valuation, must meet the same burden of proof to present substantial and persuasive evidence of the value advocated as required of the Complainant under the principles established by case law. Hermel, Inc., 564 S.W.2d at 895; Cupples-Hesse, 329 S.W.2d at 702; Brooks, 527 S.W.2d at 53.
Weight to be Given Evidence
The Hearing Officer is not bound by any single formula, rule, or method in determining true value in money and 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. St. Louis County v. Security Bonhomme, Inc., 558 S.W.2d 655, 659 (Mo. banc 1977); St. Louis County v. STC, 515 S.W.2d 446, 450 (Mo. 1974); Chicago, Burlington & Quincy Railroad Company v. STC, 436 S.W.2d 650 (Mo. 1968).
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 deemed necessary when viewed in connection with all other circumstances. Beardsley v. Beardsley, 819 S.W.2d 400, 403 (Mo. App. W.D. 1991). The Hearing Officer, as the trier of fact, is not bound by the opinions of experts but may believe all or none of the expert’s testimony or accept it in part or reject it in part. Exchange Bank of Missouri v. Gerlt, 367 S.W.3d 132, 135-36 (Mo. App. W.D. 2012).
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. See, Nance v. STC, 18 S.W.3d 611, 615 (Mo. App. W.D. 2000); Hermel, Inc., 564 S.W.2d at 897; 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. v. STC, 854 S.W.2d 526, 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. 1974).
“For purposes of levying property taxes, the value of real property is typically determined using one or more of three generally accepted approaches.” Snider v. Casino Aztar/Aztar Missouri Gaming Corp., 156 S.W.3d 341, 346 (Mo. banc 2005), citing St. Louis County v. Security Bonhomme, Inc., 558 S.W.2d 655, 659 (Mo. banc 1977). “Each valuation approach is applied with reference to a specific use of the property—its highest and best use.” Snider, 156 S.W.3d at 346-47, citing Aspenhof Corp., 789 S.W.2d at 869. “The method used depends on several variables inherent in the highest and best use of the property in question.” Snider, 156 S.W.3d at 347. “Each method uses its own unique factors to calculate the property’s true value in money.” Id.
In this case, the appraisal reports of Lauer and Flecke determined that the highest and best use of the subject property is retail commercial use, which is its current use. (Exhibit A; Exhibit 1)
Income Approach
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. The income approach is based on an evaluation of 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.
When applying the income approach to valuing income producing property for ad valorem tax purposes, it is not proper to consider income derived from the business and personal property; only income derived from the land and improvements should be considered. 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. The basic steps in the income approach are as follows:
- Estimate potential gross income;
- Deduct for vacancy and collection;
- Add miscellaneous income to get the effective gross income;
- Determine operating income;
- Deduct operating expenses from the effective gross income to determine net operating before discount, recapture and taxes;
- Select the proper capitalization rate;
- Determine the appropriate capitalization procedure to be used;
- Capitalize the net operating income into an estimated property value.
Property Assessment Valuation 2nd Ed., IAAO, page 204.
“In considering the income and expenses of a property, a decision must be made on how to treat the property taxes.” Property Assessment Valuation 2nd Ed., IAAO, page 240. “When property is valued for ad valorem tax purposes, taxes should not be considered an expense item.” Id. Only typical and reasonable expenses can be used because any deduction from gross income directly affects the indicated property value through the income approach. Id. Ad valorem taxes are based upon the value of the property itself; therefore, the practice of using property taxes as an expense item is based on a preconceived value and discredits the whole approach. Id.
Sales Comparison Approach
Section 137.115 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. St. Joe Minerals Corp. v. State Tax Commission, 854 S.W.2d 526, 529 (Mo. App. E.D. 1993); Missouri Baptist Children’s Home v. State Tax Commission, 867 S.W.2d 510, 512 (Mo. banc 1993). True value in money is defined in terms of value in exchange and not value in use. Daly v. P. D. George Company, et al, 77 S.W.3d 645, 649 (Mo. App E.D. 2002), citing, Equitable Life Assurance Society v. STC, 852 S.W.2d 376, 380 (Mo. App. 1993); citing, Stephen & Stephen Properties, Inc. v. STC, 499 S.W.2d 798, 801-803 (Mo. 1973).
It is the fair market value of the subject property on the valuation date. Hermel, supra.
Market value is the most probable price in terms of money that a property should bring in a competitive and open market under all conditions requisite to a fair sale, with 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:
- Buyer and seller are typically motivated.
- Both parties are well informed and well advised, and both acting in what they consider their own best interests.
- A reasonable time is allowed for exposure in the open market.
- Payment is made in cash or its equivalent.
- Financing, if any, is on terms generally available in the Community at the specified date and typical for the property type in its locale.
- 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. Real Estate Appraisal Terminology, Society of Real Estate Appraisers, Revised Edition, 1984; See also, Real Estate Valuation in Litigation,J. D. Eaton, M.A.I., American Institute of Real Estate Appraisers, 1982, pp. 4-5; Property Appraisal and Assessment Administration, International Association of Assessing Officers, 1990, pp. 79-80; Uniform Standards of Professional Appraisal Practice, Glossary.
Discussion
In these appeals, both parties presented substantial evidence to support their opinions of the TVM that should have been placed on the subject property as of January 1, 2017. Substantial evidence is that which is relevant, adequate, and reasonably supports a conclusion. Cupples Hesse Corp., 329 S.W.2d at 702. However, upon close inspection, only Complainant’s evidence of value was also persuasive. Persuasive evidence is that which causes the trier of fact to believe, more likely than not, the conclusion advocated is the correct conclusion. Id.
First, it must be recognized that Complainant’s opinion of the subject property’s TVM as of January 1, 2017, is twice the amount Complainant admittedly paid for the property. Consequently, the sale price of the subject property in June 2017, six months following the relevant tax date, carries no weight in determining the property’s TVM in this appeal.
Second, Exhibit A, the appraisal report of Complainant’s expert, Lauer, thoroughly and clearly explained the reasoning to support his opinion of the subject property’s TVM on the relevant tax date. In arriving at an opinion of value, Lauer gave the most weight to the income approach. After studying the analyses of all the approaches to value contained in both Exhibit A and Exhibit 1, the Hearing Officer finds the income approach reported in Exhibit A to be the best indicator of the subject property’s TVM as of January 1, 2017. Particularly persuasive was the fact that Lauer had obtained information directly from Complainant and Steiner, the purchasing broker, regarding the subject property’s condition and tenants near the relevant tax date. Although Lauer did not have historical income and expenses to review, he had the rent roll and the ongoing budgeted expenses. Lauer, unlike Flecke, properly excluded the real estate taxes from the calculation of expenses. Lauer also developed a capitalization rate based on known information, i.e., the risk related to the potential closing of the two major tenants in the subject property and published sources relied upon by appraisers.
Third, the evidence as a whole established that the subject property had substantial deferred maintenance as of the date Complainant acquired the property, six months after the valuation date. Respondent’s own evidence, Exhibit 1, included the TerraCon report, which described the subject property’s condition in early 2017. The TerraCon report provided estimates for replacement reserves totaling between $1,172,549 and $1,232,451. Consequently, one can reasonably infer that the deferred maintenance was significant in terms of cost, was present on the valuation date, and had an effect on the TVM.
Moreover, Respondent’s Exhibit 1 drew conclusions from surveys of comparable properties without clearly explaining the connections between the source data and the assumptions made. For example, Exhibit 1 did not clearly explain the reason for choosing the dollar-per-square-foot assigned to the subject property, $80.00 per square foot, which fell between the “high” and “low” calculation of comparable properties but was neither the average dollar-per-square-foot nor the median dollar-per-square foot. Flecke testified that he did not create an adjustment grid for the comparable properties because his analysis was qualitative. One can infer that “qualitative” is the equivalent of “subjective.” Without objective support for the conclusions and calculations in Exhibit 1, the Hearing Officer would be forced to engage in speculation to conclude that Respondent’s opinion of TVM was correct. The Hearing Officer will not engage in such speculation.
Conclusion
Complainant presented substantial and persuasive evidence supporting an opinion that the correct TVM of the subject property as of January 1, 2017, was $2,000,000 (assessed value $640,000).
ORDER
In this appeal, the assessed valuations of the subject property for the subject tax day is SET ASIDE.
Application for Review
A party may file with the Commission an application for review of this decision within thirty days of the mailing date set forth in the Certificate of Service for this Decision. The application shall contain specific facts or law as grounds upon which it is claimed the decision is erroneous. Said application must be in writing addressed to the State Tax Commission of Missouri, P.O. Box 146, Jefferson City, MO 65102-0146, and a copy of said application must be sent to each person at the address listed below in the certificate of service.
Failure to state specific facts or law upon which the application for review is based will result in summary denial. Section 138.432, RSMo
Disputed Taxes
The Collector of Jefferson County, as well as the collectors of all affected political subdivisions therein, shall continue to hold the disputed taxes pending the possible filing of an Application for Review, unless said taxes have been disbursed pursuant to a court order under the provisions of Section 139.031.8, RSMo.
Any Finding of Fact which is a Conclusion of Law or Decision shall be so deemed. Any Decision which is a Finding of Fact or Conclusion of Law shall be so deemed.
SO ORDERED December 4, 2018.
STATE TAX COMMISSION OF MISSOURI
Amy S. Westermann
Senior Hearing Officer
Certificate of Service
I hereby certify that a copy of the foregoing has been sent electronically or mailed postage prepaid this 4th day of December, 2018, to: Complainants(s) counsel and/or Complainant, the County Assessor and/or Counsel for Respondent and County Collector.
Jacklyn Wood
Legal Coordinator
[1] All statutory references are to RSMo 2000, unless otherwise noted.
[2] The appraisal report noted that it relied upon the budgeted 2018 expenses for the subject property because the historical expenses prior to Complainant’s acquisition of the subject property were not provided. The appraisal report noted the budgeted 2018 expenses and then either rounded up some of the budgeted 2018 expenses or did not use some of the budgeted expenses. This Decision utilizes the same expenses utilized by the appraisal report rather than all of the budgeted 2018 expenses.