State Tax Commission of Missouri
HOLTS SUMMIT SQUARE,)
)
Complainant,)
)
v.)Appeal No.07-46500
)
DANIEL ROE, ASSESSOR,)
CALLAWAY COUNTY, MISSOURI,)
)
Respondent.)
ORDER
AFFIRMING HEARING OFFICER DECISION
UPON APPLICATION FOR REVIEW
On May 6, 2009, Hearing Officer Maureen Monaghan entered her Decision and Order (Decision) setting aside the assessments by the County Board of Equalization.
Respondent timely filed his Application for Review of the Decision.Complainant timely filed its Response.
CONCLUSIONS OF LAW
Standard Upon Review
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.[1]
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 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.[2]
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.[3]
DECISION
Respondent’s Ground for Review
Respondent puts forth a series of assertions as to error in the Hearing Officer’s Decision.However, the only issue in dispute in the appeal was the correct equity portion of the capitalization rate.The pivotal point of contention both at hearing and in the Application for Review is the equity dividend rate.
Respondent did not offer any evidence about what investors in the market would consider when determining whether to make an investment in this real property.Respondent’s expert did not examine the context of the Maryville Formula[4] he claimed to apply.The Maryville Properties methodology for valuing subsidized properties considers the economic realities of the financing arrangements and the impact of those financing arrangements on the income stream of subsidized housing.[5]An important economic reality is that these properties compete with other investment opportunities for investment dollars.[6]Consequently, any appraiser must look at the market and see what return rates investors expect for a return on and return of their investment.An appropriate equity dividend rate must be used.[7]
The appropriate rate in a given case is developed from the evidence in the record and the exercise of judgment of an individual experienced in and familiar with the process of determining capitalization rates.[8]Complainant’s expert has extensive experience in the market and is very familiar with the type of properties being discussed.[9]He studied prior STC decisions in this area and followed the directions provided in those decisions.[10]Determining the capitalization rate required by the Maryville formula required someone familiar with the process of determining capitalization rates to review the market.[11]Complainant’s witness did this and determined the appropriate capitalization rate for the equity portion of the equation.[12]
Respondent’s expert did not conduct a market survey.[13]This was based on his claim that a market survey calculates the “equity yield rate.[14]
When the Maryville Formula was being developed, the equity portion of the capitalization rate was originally referred to as a “yield rate” by both Respondent’s and Complainant’s experts in Maryville Properties.It was also called the equity dividend rate.Regardless of the label used, one must look to the market for this rate and expect experienced people to use judgment to determine an appropriate rate.By so doing it is possible to determine how the market values the real property.
In the present case, Respondent’s expert did none of the analysis performed by the experts in Lebanon Properties and Maryville Properties or in the cases that followed, nor did he perform a market analysis, such as the one conducted by Complainant’s expert.The calculation utilized by Respondent’s expert did not account for a return on and return of the investment.[15]Consequently the Hearing Officer correctly rejected Respondent’s approach.An investor properly expects a return on and return of their investment.[16]
Conclusion
The issue in dispute was the appropriate rate to use in the equity portion of the capitalization rate to value Complainant’s real property.The Hearing Officer correctly used the Maryville Formula’s market-based analysis.In arriving at the equity portion of the capitalization rate, the prudent investor would look at a market rate that would provide a return on and return of the investment.Accordingly, the equity return must be derived from the market.The Hearing Officer correctly used the market-derived rate testified to by Complainant’s expert of 15%.
A review of the record in the present appeal provides support for the determinations made by the Hearing Officer.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 his discretion as the trier of fact and concluder of law in this appeal.[17]The Hearing Officer did not err in her determinations as challenged by Respondent.
ORDER
The Commission upon review of the record and Decision in this appeal, finds no grounds upon which the Decision of the Hearing Officer should be reversed or modified.Accordingly, the Decision is affirmed.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 Callaway County, 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 30, 2009.
STATE TAX COMMISSION OF MISSOURI
Bruce E. Davis, Chairman
Jennifer Tidwell, Commissioner
Charles Nordwald, Commissioner
DECISION AND ORDER
HOLDING
Decision of the Callaway County Board of Equalization sustaining the assessment made by the Assessor is SET ASIDE.True value in money for the subject property for tax years 2007 & 2008 is set at $683,200, residential, assessed value $129,808.
ISSUE
The issue in this case is the true value in money of the subject property for tax years 2007 and 2008.
SUMMARY
Complainant appeals the assessment of its subsidized housing apartment complex.The Callaway County Assessor determined, and the Board of Equalization affirmed, that the subject property had a market value of $1,303,940 (assessed value $252,400 residential & commercial) for tax years 2007 and 2008.The Complainant appealed to the State Tax Commission and proposed a value of $453,200 (assessed value $86,108 residential).
A hearing was held on November 13, 2008, at the Callaway County Courthouse, Fulton, Missouri.Complainant was represented by counsel, Cathy Dean.Respondent appeared in person and with counsel, Robert Sterner.At the Hearing, the Complainant proposed a value of $453,200 and the Respondent proposed a value of $1,271,520.The Complainant filed a brief on February 5, 2009.The Respondent replied on March 16, 2009.The Complainant replied on May 1, 2009.
EXHIBITS
The following exhibits were submitted by the parties and accepted into the record:
Complainant’s Exhibits
|
A |
Revised Income and Expense Worksheet |
|
B |
Maryville Properties Decision |
|
C |
Lake Ozark Village Decision |
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D |
Crystal City Decision |
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E |
Branson Christian Decision |
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F |
Declaration of land Use Restriction Covenants |
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G |
Independent Audit 2006 |
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H |
Independent Audit 2005 |
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I |
Independent Audit 2004 |
|
J |
Written Direct Testimony Robert Muchow |
|
K |
Written Direct Testimony of Brad Beggs |
Respondent’s Exhibits
|
1 |
Restrictive Use Appraisal Report |
|
2 |
Written Direct Testimony of Charles Trail |
|
3 |
Worksheet |
FINDINGS OF FACT
1.Jurisdiction over this case is proper.Complainant timely filed its appeal from the decision of the Callaway County Board of Equalization.
2.The property is identified as tax ID number 25-07-0-25.0-20-001-002.000, more commonly known as Callaway Villa Apartments, owned by Holts Summit Square, 211 W Simon Blvd, Holts Summit, Missouri.
3.The subject parcel is 5.37 acres with improvements consisting of three, two-story multi-family buildings. There are a total of forty-eight units.The improvements include an office and surface parking.
4.The apartment complex was built in 1994-1995.
5.Forty percent (40%) of the apartments are restricted to tenants earning 60% or less of the area median income under the Low Income Housing Tax Credit (LIHTC) program administered by the Missouri Housing Development Commission.
6.The total construction cost of the development was $1,947,066 of which $1,360,000 was financed with a one-percent (1%) MHDC loan for a period of forty (40) years.
7.In exchange for accepting restrictions on tenant eligibility, based on personal or family income levels, and restrictions on initial rent levels as well as future rental increases, developers are granted credits that can be applied toward federal and state income tax liabilities.Although these tax credits run with the land, our Supreme Court has ruled that said credits are not to be considered when determining market value of subsidized properties.
8.Calculating value based upon actual income, actual expenses, and actual interest and capitalization rates is the best way to recognize all benefits and risks associated with subsidized housing.[18]The Uniform Standards of Professional Appraisal Practice allows appraisers to deviate from traditional approaches to value when required by the jurisdiction.[19]
9.The parties agree that:
a.The effective gross income for the subject property was $189,204;
b.The expenses were $137,554;
c.The net operating income was $51,650;
d.The loan to value ratio is 70%;
e.The loan constant is .30343;
f.The loan amount was $1,360,000
g.The equity to value ratio is 30%
h.The cost of the project was $1,947,066.
10.The correct value for the subject property is calculated as follows:
|
$189,204 |
|
|
$137,554 |
|
|
$51,650 |
|
|
|
|
|
Capitalization: Loan to Value x Loan Constant[d]
Equity to value x Equity Dividend Rate [e]
Tax Rate |
2.12%
4.5%
.94% |
|
Overall Cap Rate |
7.56% |
|
Indicated Value |
$683,200 |
11.The true value in money for the subject property for tax years 2007 and 2008 is $683,200, assessed value $129,808.
CONCLUSIONS OF LAW
Jurisdiction
The Commission has jurisdiction to hear this appeal and correct any assessment which is shown to be unlawful, unfair, arbitrary or capricious.[20]
Complainant’s Burden of Proof
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 the tax day.[21] Substantial evidence can be defined as such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.[22] 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.[23]
Duty to Investigate
In order to investigate appeals filed with the Commission, the Hearing Officer has the duty to 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. The Hearing Officer’s decision regarding the assessment or valuation of the property may be based solely upon her inquiry and any evidence presented by the parties, or based solely upon evidence presented by the parties. [24]
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.[25]
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 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.[26]
Opinion Testimony by Experts
If specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert on that subject, by knowledge, skill, experience, training, or education, may testify thereto.
The facts or data upon which an expert bases an opinion or inference may be those perceived by or made known to the expert at or before the hearing and must be of a type reasonably relied upon by experts in the field in forming opinions or inferences upon the subject and must be otherwise reliable, the facts or data upon which the expert relies need not be admissible in evidence. [27]
Official Notice
Agencies shall take official notice of all matters of which the courts take judicial note. [28]
Courts will take judicial notice of their own records in the same cases.[29] In addition, courts may take judicial notice of records in earlier cases when justice requires[30] ‑ or when it is necessary for a full understanding of the instant appeal.[31]
Commission Determines Methodology
It is within the State Tax Commission’s discretion to determine what method or approach it shall use to determine the true value in money of property.[32] It is also within the State Tax Commission’s authority to ascertain the correct or modern means of determining value according to a particular method or approach that it adopts to ascertain valuation, and it is within the Commission’s discretion to determine what factors should be considered in fixing the “true value in money” for property under a valuation method or approach adopted for use in a particular case.[33] The relative weight to be accorded any relevant factor in a particular tax assessment case is for the State Tax Commission to determine.[34] State Tax Commission decisions must declare the propriety of and the proper elements to consider in adopting a valuation approach, and must provide a definite indication as to the weight accorded each approach or method, i.e., how the final decision is weighed between the various approaches, methods, elements and factors.[35] The determination of “true value in money” of any property is a factual issue for the State Tax Commission.[36]
Proper Methodology
It is within the authority and expertise of the Tax Commission to determine which valuation methodology best represents value in a given situation or for a particular category of properties.[37] After carefully considering the benefits and risks associated with subsidized housing, the State Tax Commission, in Maryville Properties[38], determined that calculating value based upon actual income, actual expenses, and actual interest and capitalization rates was the best way to recognize all benefits and risks associated with subsidized housing.
In Lake Ozark Village v. Whitworth, we stated:In this case, and all subsequent subsidized housing cases, the correct methodology for valuing subsidized housing projects is the methodology set out in Maryville Properties. That methodology is accurate because (1) rent restrictions are considered through the use of actual income rather than market income; (2) additional management requirements and expenses are accounted for through use of actual expenses which are in excess of market expenses; and (3) the actual loan‑to‑value ratio and the subsidized interest rate demonstrates and accounts for any and all risks involved in the property as well as the benefits flowing to the property.It is “economic reality.”
DISCUSSION
The risks and benefits associated with low-income housing must be measured in some fashion and, at this point in time, the best evidence of the risks and benefits of this type of endeavor is the willingness of the taxpayers to invest in same in exchange for the income and tax credits flowing from those investments.Although there has been only one sale of subsidized properties, if the subject property should sell, there is no evidence that the next purchaser would be able to obtain more favorable financing than the current owner presently enjoys.A substantial equity position would probably be required by MHDC.Our determination of value considers these factors and is consistent with the mandate of the Supreme Court in Missouri Baptist Children’s Home v. State Tax Commission[39], that we consider the “economic realities” of a particular piece of property when attempting to determine market value.
In Lake Ozark Village and Maryville Properties, we stated that the income approach should be developed using actual income and expenses realized by the subsidized property; it should use the loan-to-value ratio approved by the subsidizing agency based upon the subsidized mortgage rate; it should allow an appropriate equity dividend rate; and taxes should be included in the capitalization rate.
The parties agreed to most of the figures used in the calculation except for the equity dividend rate.The Assessor’s expert, CharlesTrail, a State certified general appraiser, cited the Dictionary of Real Estate Appraisal, 4th Edition:
“Equity Dividend Rate as: Equity Capitalization Rate: an income rate that reflects the relationship between a single year’s pre-tax cash flow expectancy and the equity investment; used to convert pre-tax cash flow (equity dividend) into an equity value indication; also called the cash on cash rate, cash flow rate, or equity dividend rate.”
His rate considered the subject’s pre-tax cash flow as a percentage of the subject’s original equity amount.He believes that it is based upon the economic realities present in the property and considers the specific financing, net income, debt service, and owner’s cash outlay for equity.
The Assessor’s expert criticizes the Complainant’s equity rate selected stating that the Complainant’s rate would be more in line with an expected equity yield rate, also called the internal rate of return, which would be the total return on equity including the proceeds from the sale of the property at the end of the income projection period.
In Sixth Street Partners[40], we stated that “someone familiar with the process of determining capitalization rates must review the market and estimate the appropriate capitalization rate for the equity portion of this equation.”The Complainant complied with the prior decisions of the State Tax Commission when determining the appropriate equity dividend rate to use.
The Complainant’s expert testified that he researched the market capitalization rates by interviewing those that invest in subsidized housing projects.Those parties considered other investment opportunities and the risks and benefits associated with investing in subsidized housing.As stated in Crystal City/Festus Partnership v. Jefferson County Assessor[41], “[i]t is not wholly clear that individuals who invest in subsidized housing projects are placing their funds at higher risk than other investments which would warrant a [higher] equity dividend rate.Likewise, it has not been established that this investment is reasonably safe warranting a [lower market] equity dividend rate.” [42]
The market rate concluded by the Complainant’s expert is an appropriate rate for this property.The Complainant’s expert believed that the market rate is between 15-20%, believing that 15% would be appropriate with this development.
ORDER
The value placed upon the subject property for tax years 2007 and 2008 is hereby SET ASIDE.The clerk is hereby ordered to place the correct value of $683,200 (assessed value $129,808 residential) on the subject property for tax years 2007 and 2008.
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.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, MO65102-0146, 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 appeal is based will result in summary denial.
If an application for reviewof a hearing officer decision is made to the Commission, any protested taxes presently in an escrow account in accordance with this appeal shall be held pending the final decision of the Commission. If no application for review is received by the Commission within thirty (30) days, this decision and order is deemed final and the Collector of Callaway County 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. If any protested taxes have been disbursed pursuant to Section 139.031(8), RSMo, either party may apply to the circuit court having jurisdiction of the cause for disposition of the protested taxes held by the taxing authority.
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 May 6, 2009.
STATE TAX COMMISSION OFMISSOURI
Maureen Monaghan
Hearing Officer
[1] 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).
[2] 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).
[3] Black v. Lombardi, 970 S.W.2d 378 (Mo. App. E.D. 1998); Lowe v. Lombardi, 957 S.W.2d 808 (Mo. App. W.D. 1997); Forms World, Inc. v. Labor and Industrial Relations Com’n, 935 S.W.2d 680 (Mo. App. W.D. 1996); Evangelical Retirement Homes v. STC, 669 S.W.2d 548 (Mo. 1984); Pulitzer Pub. Co. v. Labor and Indus. Relations Commission, 596 S.W.2d 413 (Mo. 1980); St. Louis County v. STC, 562 S.W.2d 334 (Mo. 1978); St. Louis County v. STC, 406 S.W.2d 644 (Mo. 1966).
[4] Maryville Properties, L.P. v. Nelson, 83 S.W.3d 608 (Mo. App. W.D. 2002);Maryville Properties, L.P. v. Nelson, STC Appeal No. 97-75500.
[8] See, Lebanon Properties I, II & III v. North, STC Appeal Nos. 97-64002 – 07-64005 at 15 (typical equity rates are 12% to 18%);Crystal City/Festus Partnership v. Holman, STC Appeal Nos. 97-34011 & 97-34012, 99-34013 & 99-34014, 01-34005, 03-34025 & 03-34026 at 10. (Market dividend rates are between 8% and 18%);Branson Christian County v. Bryant, STC Appeal Nos. 97-50500, 99-50500 & 01-50500 at 9 (Market dividend rates are between 8% and 18%); Stockton Estates v. Johnson, STC Appeal Nos. 97-49502, 99-49500 & 01-49500 at 11 (Market dividend rates are between 9% and 18%).
[17] Hermel, Inc. v. STC, 564 S.W.2d 888 (Mo. 1978); Black v. Lombardi, 970 S.W.2d 378 (Mo. App. E.D. 1998); Holt v. Clarke, 965 S.W.2d 241 (Mo. App. W.D. 1998); Smith v. Morton, 890 S.W.2d 403 (Mo. App. E.D. 1995); Phelps v. Metropolitan St. Louis Sewer Dist., 598 S.W.2d 163 (Mo. App. E.D. 1980).
[25] St. Louis 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).
[26] 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).
[27] Section 490.065, RSMo; Courtroom Handbook on Missouri Evidence, Wm. A. Schroeder, Sections 702‑705; pp. 325‑350; Wulfing v. Kansas City Southern Industries, Inc., 842 S.W.2d 133 (Mo. App. E.D. 1992).
[29] State ex rel. Horton v. Bourke, 129 S.W.2d 866, 869 (1939); Barth v. Kansas City Elevated Railway Company, 44 S.W. 788, 781 (1898).
[30] Burton v. Moulder, 245 S.W.2d 844, 846 (Mo. 1952); Knorp v. Thompson, 175 S.W.2d 889, 894, transferred 167 S.W.2d 205 (1943); Bushman v. Barlow, 15 S.W.2d 329, 332 (Mo. banc 1929)
[31] State ex rel. St. Louis Public Service Company v. Public Service Commission, 291 S.W.2d 95, 97 (Mo. banc 1956).