Hotel KCI LLC v. Christian (Platte County)

State Tax Commission of Missouri

 

HOTEL KCI, LLC,)

)

Complainant.)

)

v.)Appeal(s) Number 09-79010 and 09-79011

)

DAVID CHRISTIAN, ASSESSOR,)

PLATTE COUNTY, MISSOURI,)

)

Respondent.)

 

 

DECISION AND ORDER

 

HOLDING

 

The value determined by the Assessor and approved by the Board of Equalization is SET ASIDE.The correct value for the property on January 1, 2009, was $7,194,600 (assessed value $2,302,270).The correct value for the property on January 1, 2010, was $8,917,240 (assessed value $2,853,520).

SUMMARY

The subject properties are two parcels improved with a 141 room hotel.Appeal Number 09-79010 (Parcel Number 17-6.0-23-000-000-012.001) is the hotel and Appeal Number 09-79011(Parcel No. 17-6.0-23-000-000-015.000) is the parking lot.The property (combined) was originally valued by the Assessor at $9,381,930 (assessed value $3,002,220).That value was affirmed by the Board of Equalization.Upon appeal, Complainant asserts a value of $4,700,000.Respondent asserts a value of $9,300,000.

A hearing was conducted on November 17, 2010, June 8, 2011 and June 14, 2011, before Senior Hearing Officer Luann Johnson, at the Platte County Administration Building, Platte City, Missouri.Complainant appeared by its appraiser, Troy W. Smith, and by its attorney, Richard Dvorak.Respondent appeared by his appraiser, Brian Everly, and by counsel, John R. Shank.Pursuant to Tax Commission Order, both parties prefiled their appraisal reports and written direct testimony.

EXHIBITS

Complainant presented the following exhibits:

 

The following rebuttal exhibits were accepted into the record:

 

Respondent presented the following exhibits:

 

 

 

ISSUE

The issue raised on appeal is: What was the true value in money of Complainant’s property on January 1, 2009, and January 1, 2010, and, specifically, what impact did a mold issue, and its subsequent remediation, have on value?

FINDINGS OF FACT

1.Jurisdiction.Jurisdiction over this appeal for tax year 2009 and 2010 is proper. Complainant timely appealed to the State Tax Commission from the decision of the Platte County Board of Equalization.

2.Subject Property.The subject property is a 2.10 acre tract improved with a six story, 141 room, full-service hotel containing 82,838 square feet of gross building area identified as parcel number Parcel Number 17-6.0-23-000-000-012.001 and an additional 3.94 acres of parking across the street identified as Parcel Number 17-6.0-23-000-000-015.000.The property was built in 2006 and is more commonly known as 11728 N. Ambassador Drive, Kansas City, Platte County, Missouri.The subject property is located adjacent to the Expo Center and one mile from the airport.It has good visibility from I-29.

3.Deferred Maintenance.As of the tax day, the property suffered from mold due to shoddy construction.The cost to cure the mold issue and certain other drainage issues was $2.1 million.The cost of remediation is being carried as an accounts receivable on the business books pending the conclusion of arbitration and/or litigation.

Mold was discovered in the property in 2007.Remediation began in February of 2009 and was completed early in 2010.Complainant’s appraiser testified that the majority of the repairs were made in 2009.Remediation was considered deferred maintenance in Complainant’s appraisal and Complainant’s appraiser testified that a knowledgeable purchaser would consider the cost of remediation when making a decision to purchase the property.

Any repairs made to the subject property between January 1, 2009, and January 1, 2010 would constitute new construction and property improvements which would result in a different value between January 1, 2009, and January 1, 2010.Likewise, any changes between January 1, 2010, and January 1, 2011, would also be new construction and property improvements.Complainant’s appraisal is not reliable inasmuch as it fails to account for changes in the condition between January 1, 2009, and January 1, 2010.

Referring to rebuttal exhibit G, Complainant’s witness, Gary Endicott, identified no more than $377,356 that was spent on these deferred maintenance items in 2010.The remainder of the $2.1 million ($1,722,644) was spent in 2009.

4.Furniture Fixtures and Equipment.The guest rooms have furnishings typical of an upscale, full-service hotel.[1]Complainant reported a value of $956,517 for all of its personal property as of January 1, 2009.We have typically used the Complainants’ declarations as a basis for the personal property adjustment.Complainant’s appraiser’s use of $1.3 million for FFE is not supported by declarations filed by the taxpayer and is not credible because it includes installation, sales tax and other intangible costs.

5.Management.The subject property performed at or above market levels.Deducting a management fee from income removes a portion of the business component from the income.[2]Respondent correctly calculated management by recognizing it as part of the expense deduction.

6.Franchise.The subject property carries a “Holiday Inn” flag.An additional business value deduction must be made if the property benefits from a chain affiliation.This is accomplished by either increasing the management fee expense or making a separate franchise fee deduction.[3]Respondent correctly calculated the franchise part of management by recognizing it as part of the expense deduction.

7.Highest and Best Use. The highest and best use of the property is as improved.

8.Occupancy. The subject property’s occupancy during 2007 was 62.3% and

occupancy during 2008 was 60%.However, the subject property is not yet stabilized. Management anticipated an increase to 73.7% occupancy in 2009.[4]Complainant’s appraiser estimates the appropriate occupancy rate for the subject property to be 60%.The average occupancy for the subject market was 65%.[5] Respondent’s appraiser used a 65% occupancy rate. The correct occupancy rate is the market occupancy rate of 65%.

9.Rental Rates. The subject’s average daily rate in 2008 was $93.Respondent used an average daily room rate (ADR) of $93.Complainant’s appraiser used an ADR of $94.02.The correct ADR is $93 based upon actual earnings.

10.Income Approach Most Reliable. The income approach, when done correctly, is the most reliable way to value the subject property. The sales comparison approach is not a reliable mechanism for valuing properties which have business value and personal property components because of the inability to adjust the comparable sales for these variances. Because of the age of the improvements, the cost approach is not a reliable indicator of the value of the subject property.

11.Total Annual Stabilized Revenue. The correct room revenue of the property is $3,111,059 ($93 x .65 x 141 x 365).Further, the subject property has actual food and beverage income of $410,544 and other income of $108,658.The potential gross income for the subject property for tax year 2009 and 2010 is $3,630,261 ($3,111,059 + $410,544 + $108,658 = $3,630,261).

12.Expenses.Market expenses are 75% of Potential Gross income.Respondent utilized this 75% expense ratio before Reserves for Replacement.Complainant used a 61% expense ratio because Complainant’s appraiser removed management fees and franchise fees from expenses to be deducted later.Respondent’s methodology is correct.The correct deduction for expenses if $2,722,696 ($3,630,261 x .75 = $3,722,696).

13.Reserves for Replacement.The correct deduction for Reserves for Replacement, which includes return of personal property, is 3% or $108,599.

14.Net Operating Income. The correct net operating income is $798,966. ($3,630,261 –$2,722,696 = $907,565 – $108,599 = $798,966).

15.Capitalization Rate.Complainant presented evidence of sales with overall rates 6.9% to 9.97%.Complainant’s appraiser determined that the appropriate cap rate was 8.5% to which he added 2.24% as the effective tax rate for a total capitalization rate of 10.74%.Complainant’s appraiser deducted real estate taxes from his expenses because he intended to add an effective tax rate to his cap rate calculations.However, he failed to adjust the cap rates derived from the sales to take out the taxes inherent in those calculations; thus Complainant’s capitalization rate overstates the appropriate capitalization rate.

Respondent utilized an 8.5% capitalization rate, left real estate taxes in his expense calculations and did not add an effective tax rate.

In a perfect world and with a mortgage-equity built up rate, real estate taxes would be removed from expenses and incorporated into the capitalization rate as an effective tax rate.Neither appraiser prepared a mortgage-equity calculation.We find that an effective tax cannot be added to a capitalization rate which already includes a tax rate inasmuch as it would overstate the appropriate capitalization rate.Therefore we find that the appropriate capitalization rate for the subject property is 8.5%.

16.Value Before Deduction of Intangible or Personal Property Values. The correct value for the subject property, before the deduction of any intangible business values or value attributable to personal property, is $9,399,600 ($797,966/.085 = $9,399,600).

17.No Additional Business Value Deduction.Expenses include a deduction for management fees and a deduction for franchise fees. No additional business value remains to be deducted from the value of the real property.

18.No Additional Return of Personal Property Required. Expenses include a deduction for the periodic replacement of furniture, fixtures and equipment. No additional return of personal property is required to be deducted from the value of the real property.

19.Return on Personal Property. Complainant is entitled to a return on personal property to recognize the contributory affect of personal property on the income producing capacity of the subject property. However, the contributory affect of the personal property on the income stream is not the depreciated value of that personal property. Only the income generated by the personal property can be deducted from the income stream. Return on personal property is calculated by multiplying the value of the personal property by a reasonable rate of return.

Complainant’s appraiser’s use of $1.3 million for FFE is not supported by declarations filed by the taxpayer and is not credible because it includes installation, sal

es tax and other intangible costs.Respondent’s appraiser utilized the estimated the depreciated value of the FF&E of $956,517, as provided by Complainant.Both appraisers agreed that the appropriate rate of return for the FF&E is 11%, or $105,000.We find this rate of return to be reasonable and adopt same.

20.True Value in Money of Real Property Before Adjustment for Mold and other Maintenance. The true value in money of the real property is hereby set at $9,294,600 ($9,399,600- $105,000 = $9,294,600).

21.True Value in Money for Tax Year 2009.The true value in money for the subject property on January 1, 2009, before any remediation, was $7,194,600 ($9,294,600 – $2,100,000 = $7,194,600).

22.True Value in Money for Tax Year 2010.The true value in money for the subject property on January 1, 2010, after most of the remediation was completed, was $8,917,240 ($9,294,600 -$377,356 = $8,917,244 say $8,917,240).

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.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.[6]

Official and Judicial Notice

Agencies shall take official notice of all matters of which the courts take judicial notice.[7]

Courts will take judicial notice of their own records in the same cases.[8]In addition, courts may take judicial notice of records in earlier cases when justice requires[9] or when it is necessary for a full understanding of the instant appeal.<a style="mso-endnote-id: edn10;" title="" name=%