State Tax Commission of Missouri
HSB HOSPITALITY GROUP, LLC,)
v.) Appeal Number 08-77500
DEAN DOHRMAN, ASSESSOR,)
PETTIS COUNTY, MISSOURI,)
DECISION AND ORDER
Decision of the Pettis County Board of Equalization reducing the assessment made by the Assessor is SET ASIDE.True value in money for the subject property for tax year 2008 is set at $2,140,000, commercial assessed value of $684,800.Complainant appeared by Counsels Stanley Brian Cox and Daniel Baker, Cox & Associates, LLC, Sedalia, Missouri.Respondent appeared by Prosecuting Attorney Jeff Mittelhauser.Case heard and decided by Senior Hearing Officer W. B. Tichenor.
The Commission takes this appeal to determine the true value in money for the subject property on January 1, 2007.
Complainant appeals, on the ground of overvaluation, the decision of the Pettis County Board of Equalization, which reduced the valuation of the subject property.The Assessor determined an appraised value of $2,753,020, assessed value of $880,966, as commercial property.The Board reduced the true value in money to $2,505,910, assessed value of $801,890.Complainant proposed a value of $2,100,000, assessed value of $672,000.A hearing was conducted on May 18, 2009, at the Pettis County Courthouse, Sedalia, Missouri.Complainant’s Brief was received by the Commission on July 20, 2009.Respondent’s Brief was received by the Commission on July 28, 2009.Complainant’s Reply Brief was received by the Commission on July 31, 2009.
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 Pettis County Board of Equalization.
2.Property Description.The subject property is located at 3501 W. Broadway, Sedalia, Missouri.The property is identified by map parcel number 153000610300400197000.The property consists of a total area of 206,474 square feet (4.74 acres).The site is improved with a 116-room hotel containing 70,499 square feet of gross building area.The Property is otherwise known as the Ramada Inn.
3.No New Construction and Improvements.There was no evidence of new construction and improvement from January 1, 2007, to January 1, 2008.Accordingly, the value to be determined for the Complainant’s property as of January 1, 2007, remains the value for the 2008 tax year under the two year assessment cycle.
4.Income Approach Appropriate Methodology.The income approach developed and revised by Complainant’s appraiser is the appropriate methodology for determination of fair market value of the Complainant’s property as of January 1, 2007.See, Methods of Valuation – Income Approach Appropriate for Present Appraisal Problem, infra.
5.Complainant’s Evidence.Complainant presented the Appraisal Report and Testimony of Elizabeth M. Witte, Missouri State Certified General Real Estate Appraiser.Ms. Witte developed both the income and sales comparison approaches to arrive at a conclusion of the true value in money of the subject property.She adopted the income approach for her final opinion of value and opined a fair market value as of January 1, 2007, of $2,125,000. Complainant’s evidence was substantial and persuasive to rebut the presumption of correct assessment by the Board and establish the true value in money as of January 1, 2007, to be $2,125,700.
Gross Room Revenue:$865,853
Total Gross Income:$914,676
Less: Return on FF & E-$33,820
Net Operating Income:$286,317
Less: Curable Functional Obsolescence:$30,000
Gross Room Revenue:$881,835
Total Gross Income:$923,821
Less: Expenses (65%):-$600,484
Less: Return on FF & E-$33,820
Net Operating Income:$289,517
Capitalization of NOI @.13282$2,179,770
Less: Curable Functional Obsolescence:$30,000
8.Conclusion of Value.The value of $2,140,000 is concluded by giving some weight to the indicated value developed from the 2003 through 2006 income and expense data, but giving greater weight to indicated value shown from the 2004 through 2006 income and expense data.
9.Cost Approach Not Appropriate.The cost approach is not an appropriate methodology for a determination of fair market value of the Complainant’s property as of January 1, 2007.See, Methods of Valuation – Cost Approach Not Appropriate for Present Appraisal Problem, infra.
10.Respondent’s Evidence.Respondent presented his Appraisal Report and Testimony.Mr. Dohrman relied on the mass appraisal cost methodology as shown on the property record card for the subject as the basis for his opinion of $2,753,020.He did not develop the income and sales comparison approaches.Respondent’s evidence was not substantial and persuasive to rebut the presumption of correct assessment by the Board and establish the true value in money as of January 1, 2007, to be $2,753,000.
CONCLUSIONS OF LAW AND DECISION
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.
Presumptions In Appeals
There is a presumption of validity, good faith and correctness of assessment by the CountyBoardof Equalization.The presumption in favor of the Board is not evidence.A presumption simply accepts something as true without any substantial proof to the contrary.In an evidentiary hearing before the Commission, the valuation determined by the Board is accepted as true only until and so long as there is no substantial evidence to the contrary.
The presumption of correct assessment is rebutted when the taxpayer, or respondent when advocating a value different than that determined by the Board, 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.As will be addressed in detail below, Complainant’s evidence met the standard to both rebut the presumption of correct assessment and to establish the fair market value of $2,125,000.On the other hand, Respondent’s valuation did not meet the required standard and therefore cannot be adopted as the value for the Complainant’s property.
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.True value in money is defined in terms of value in exchange and not value in use.It is the fair market value of the subject property on the valuation date.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.
Complainant’s appraisal and the testimony of Ms. Witte conform to the required standard to arrive at fair market value.The actual income and expenses for the subject property provide a sound foundation for establishing a value for the real property under appeal.The value concluded by Ms. Witte in her testimony at hearing is clearly reflective of the most probable price Complainant’s property should have brought in a competitive and open market transaction on January 1, 2007.In light of the actual income and expense history of the subject property, Respondent’s conclusion of value, resting upon the mass cost appraisal of the subject, fails to establish that the value proffered in Exhibit 1 is reflective of the fair market value of the subject as of January 1, 2007.
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.
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.The weight the Hearing Officer must give to Complainant’s evidence in this present appeal is substantial and compelling.
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.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.
Income Approach Appropriate for Present Appraisal Problem
The strongest and most compelling approach to value for Complainant’s hotel is the income approach.
“The income capitalization approach is generally the preferred technique for appraising income-producing properties because it closely simulates the investment rationale and strategies of knowledgeable buyers.The approach is particularly relevant to hotel and motel properties, which involve relative high risks and are bought for investment purposes only.”
Ms. Witte’s reliance on the income approach was appropriate.The sales comparison approach developed by Complainant’s appraiser provides substantiation for her conclusion of value relying on the income approach.
Cost Approach Not Appropriate for Present Appraisal Problem
“The cost approach is seldom used to value existing hotels and motels becauselodging facilities are particularly vulnerable to physical deterioration, functional changes,and uncontrollable external factors.Sometimes a hostelry can suffer from functional andexternal obsolescence before its construction is completed.As the building and otherimprovements age and depreciate, the resultant loss in value becomes difficult toquantify.Estimating the impact of even minor forms of obsolescence may requireinsupportable judgments that undermine the credibility of the cost approach.
“A more significant reason why this approach is not applied to hotels and motels is that is underlying assumptions do not reflect the investment rationale of typical hostelry buyers.Lodging facilities are income-producing properties that are purchased to realize future profits.Replacement or reproduction cost has little bearing on an investment decision when the buyer is primarily concerned with the potential return on equity.”
The following from The Appraisal Journal gives further support to not utilizing the cost approach in a hotel valuation.
“The cost approach may provide a reliable estimate of value for newly constructed properties; however, as buildings and other forms of improvements age and begin to deteriorate the resultant loss in value becomes increasingly difficult to quantifyaccurately.Moreover, because furniture and equipment depreciate faster than a hotel’sphysical plant, separate estimates of physical depreciation, functional obsolescence, andeconomic obsolescence would be required for the personalty and realty components. This further complicates the cost approach when it is applied to a valuation for property tax purposes, which requires that only a hotel’s real estate component be considered.
“Knowledgeable buyers of lodging facilities generally base their purchase decisions on economic factors such as forecasted net income and return on investment. Because the cost approach does not reflect any of these income-related considerations but does require a number of highly subjective and unsubstantiable depreciation estimates, this approach is usually given minimal weight in the hotel valuation process.It is even less applicable than the norm when only a hotel’s real estate component is being valued.”
Finally, another source makes the following point supportive of Ms. Witte’s position to not rely on the cost approach when valuing hotel property.
“In the case of older hotels, the tendency of some appraisers is to pass lightly over or to ignore the Cost Approach to value.The reason is that it is difficult, and sometimes impossible, to estimate accurately the functional and economic obsolescence in hotel property.”
The subject hotel was built in 1973.It has undergone a number of remodels and maintenance projects since that time.Given the age of the hotel alone, the cost approach is too highly subjective to provide a basis for determining fair market value.When the additional factors of appropriately applying depreciation for physical condition, functional and economic obsolescence are considered, the cost approach for Complainant’s hotel becomes so speculative as to be unreliable.
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 need not be admissible in evidence.
The appraisal report and testimony of Complainant’s appraiser were grounded in data of a type reasonably relied upon by experts in the field of real estate appraisal.The reported analyses, opinions, and conclusions were developed and the report was prepared in conformity with the Uniform Standards of Professional Appraisal Practice (USPAP) and the Code of Professional Ethics of the Appraisal Institute.Accordingly, there is a solid foundation for reliance to be place in the conclusion of value tendered by Ms. Witte.There is no evidence in the record from which it can be determined that the conclusion of value, based upon the appraisal performed, logically can be or rationally should be discarded or ignored.
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 January 1, 2007.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.”
Substantial evidence can be defined as such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.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.
Complainant’s burden of proof has been met in the present case.
Revisiting of Ruling on Objection
Complainant’s Counsel requests by way of Complainant’s Reply Brief that the Hearing Officer revisit the ruling of March 25, 2009, whereby income and expense figures from the year 2007 would not be considered by the Hearing Officer.The Hearing Officer has given consideration to the arguments presented in the Reply Brief.Notwithstanding the reasoning advanced, the Hearing Officer finds no basis to reverse the previous ruling and utilize the 2007 income and expense figures to arrive at a conclusion of value.
A prospective purchaser of the Sedalia Ramada Inn on January 1, 2007, could not have had access to the 2007 income and expense data.The argument that utilization of the 2007 data serves to provide “a more accurate valuation” illustrating the impact of the action in late 2006 by Wyndham Worldwide Corporation in dropping support of the Ramada Inn franchise for Complainant’s property is not persuasive.Ms. Witte’s position that the significantly lower revenue in 2007 “reflects the loss of franchise support” is a reasonable conclusion.However, the Hearing Officer can readily recognize that other economic factors could have contributed to the 2007 revenue decline in addition to the loss of the Ramada franchise support.That would possibly be only one of several factors.
What monetary weight a prospective purchaser might have placed on the action by Wyndham in late 2006 is simple conjecture.It is a factor that would have been impossible for the purchaser to have quantified.The sound, hard data the purchaser would have had would be the 4 years of income and expense data.This information, as presented in Ms. Witte’s testimony, provides a sound basis for valuation of the subject property.
It would not be sound practice for the Hearing Officer to base a determination of value on data that neither the hypothetical seller nor hypothetical buyer would have had access to on January 1, 2007.Complainant’s request for a reversal of the Ruling on Objection entered on March 25, 2009, is denied.
Highest and Best Use
A determination of highest and best use of the property being valued is critical in any appraisal because it determines which appraisal approaches are appropriate and the weight to be given to each approach.
“The analysis of relevant data to develop a market value opinion requires two important steps in the valuation process before the applicable approaches to value are applied.Market/marketability analysis begins the process of narrowing the focus from a broader macro view to data that is especially pertinent to the appraised property.Highest and best use relies on that analysis to then identify the most profitable, competitive use to which the subject property can be put.The highest and best use is shaped by the competitive forces within the market where the property is located and provides the foundation for a thorough investigation of the competitive position of the property in the minds of market participants.
“An understanding of market behavior developed through market analysis is essential to the concept of highest and best use.Market forces create market value, so the interaction of market forces that identifies the highest and best use is of crucial importance.”
Complainant’s appraiser presented to the Commission a detailed market analysis to lay the foundation for her highest and best use analysis.Ms. Witte’s review analyzed the Ramada property under the required criteria. Based upon her market and highest and best use analyses the appraiser properly concluded that as improved the highest and best use of the property under appeal is for continued operation as a franchised hotel with leased restaurant/lounge.If the property were vacant, it was Ms. Witte’s conclusion that commercial development oriented to the highway traffic along Broadway would be the site’s highest and best use.
Respondent asserts his disagreement with the conclusion of highest and best use by Complainant’s appraiser. However, no market analysis or alternative conclusion of highest and best use either as vacant or as improved was provided by Respondent, either at hearing or in the post-hearing brief.Simple disagreement with a conclusion of an appraiser does not constitute credible evidence on the point.This is especially true given that Respondent testified he did not make a determination of highest and best use of Complainant’s property.The record provides no evidence upon which the Hearing Officer can conclude that the Witte analysis and conclusion on highest and best use was in error.Accordingly, Complainant’s appraiser properly determined the site’s highest and best use both if vacant and as improved.
Ms. Witte first developed the income approach to value.Given the highest and best use determination the application of the income approach is mandated.The subject is an income generating property.The purchase price any prospective buyer of the Ramada property would have paid on January 1, 2007, would have been driven by the past income stream of the property.The procedures applied by the appraiser in developing revenue and expense projections, deriving the capitalization rate and concluding her value were all appropriate and consistent with the necessary elements for the income approach.
Respondent’s Challenge to Income Approach
Respondent objected to the utilization of 2007 income and expense figures in Ms. Witte’s income analysis.The Hearing Officer issued his ruling sustaining that objection and informed the parties the 2007 income and expense data would not be considered by the Hearing Officer in rendering of this Decision.It has not.
Respondent reiterated his objection in Respondent’s Brief citing the inclusion of the 2007 data as a problem in the appraisal.Any alleged “problem” the inclusion of the data from 2007 might have been was corrected by the ruling sustaining Respondent’s objection.Respondent overlooks the critical fact that the income methodology as applied by Complainant’s appraiser was appropriate and in accord with well accepted appraisal practice.In other words, Ms. Witte’s development of the income approach was not flawed.Her inclusion of the 2007 data was not acceptable for purposes of the valuation in this proceeding.
At hearing, Ms. Witte was prepared to provide her opinion of value utilizing data on the subject property from 2003, 2004, 2005, and 2006.Counsel for Respondent objected on the ground of the Complainant’s expert giving an opinion different from the opinion provided in discovery and in the appraisal report.The objection was overruled.
The objection stated finds no basis in either the rules of evidence or the rules of the Commission for exclusion of Exhibit A, Exhibit B or direct testimony of the appraiser allowing her to present her revised opinion in light of the exclusion of the 2007 data.Full opportunity was permitted for cross-examination on all aspects of Ms. Witte’s appraisal and testimony which presented her revised conclusion of value under the income approach.
Stabilizing the four years of data for the purpose of arriving at a revised opinion of value was appropriate.The Hearing Officer has the discretion to investigate “regarding any matter or issue relevant to the valuation” of Complainant’s.The examination by Complainant’s counsel of Ms. Witte as to her revised opinion of value in light of the Hearing Officer’s ruling excluding the 2007 data from consideration was part of the investigation.The revised opinion of value was clearly relevant for a determination of the true value in money of the subject property as of January 1, 2007.
Sales Comparison Approach
Complainant’s appraiser developed the sales comparison approach to value.This analysis was based on sales of four comparable hotel properties.This approach was properly developed and presented.Ms. Witte concluded that:
“The Sales Comparison Approach is not reliable in developing an opinion of true value in money for the real property only.There is insufficient market data available to make an allocation between the three components of real property, FF & E, and intangible assets.This approach is utilized as supportive evidence of value presented in the Income Approach.”
The appraiser’s conclusion on this point is valid.Furthermore, there is no evidence upon which the Hearing Officer can find it to be in error.
“Although the sales comparison approach is seldom given substantial weight in a hotel appraisal, it can be used to bracket a value or to check the value derived by the income capitalization approach.”
The sales comparison approach as applied to hotel property provides a check and support for a value determined under the income approach.Without being able to make an allocation from market data to extract out the real property value, the sales comparison approach will generally overstate value for the property being appraised.Ms. Witte’s inclusion of the approach provided additional strength and validation for her conclusion of value.However, it was not controlling and certainly did not provide the most persuasive indicator of value.
Omission of Cost Approach
Counsel for Respondent challenged the Witte appraisal for its lack of consideration of the cost approach.The determination by Complainant’s expert to forgo the inclusion of the cost approach for this property was neither fatal to the conclusion of value, nor did it detract from the persuasiveness of the conclusion of value rendered under the income approach.As has been addressed in detail above (Cost Approach Not Appropriate for Present Appraisal Problem), this appraisal problem does not lend itself to the development of the cost approach.It serves little, if any, purpose to develop the approach for a hotel property such as this when no persuasive weight can be afforded an opinion of value derived from this methodology.
Ms. Witte in her exercise of sound appraisal judgment elected to not develop this approach to value.The appraiser properly exercised her judgment.Given the historical income and expense data for the Complainant’s property, there is no basis to conclude that any well informed investor would purchase the Ramada property based upon a cost analysis.
Reconciliation of Values
Respondent criticizes the Witte appraisal for its alleged “failure to properly reconcile the Income Approach with the Sales Comparison Approach.”There is no presentation by Respondent of exactly how Ms. Witte’s Final Reconciliation of Value was in error.The assertion of a “failure to properly reconcile” establishes nothing.Respondent’s argument that the conclusion of value “…is a wholesale rejection of the greater figure in favor of the lesser amount,” ignores the facts applicable to the basis for Ms. Witte’s Final Reconciliation.
The basis for not utilizing the value indicated by the sales comparison approach is clearly stated on page 54 of Exhibit A:
“The conclusion to value of $2,235,000 includes all components of value (real property, personal property and intangible assets).There is no market-derived method to allocate value between these components therefore, the Sales Comparison Approach is not considered as reliable as the Income Approach in developing an opinion of value for the real property only.”
Ms’ Witte’s direct testimony in answer to Question 36 reiterates the reason why concluding on the value indicated by the Income Approach was appropriate.“The sales comparison approach concluded to a value of $2,235,000, but included components of personal property and intangible assets that were not included in my valuation.As a result, I believe that the income approach yielded the most accurate value for the subject property.”
In other words, there is a sound and compelling reason why the $2,245,000 value cannot be applied directly to the valuation of Complainant’s property.The reason is that to apply that value would be to value more than Complainant’s real property.The subject of this appeal is not the business enterprise value (BEV) of the Ramada Inn, and the furniture, fixtures and equipment (FF & E – personal property). The only property to be valued is the real property.
When dealing with sales comparison data on hotel/motel properties an appraiser must properly recognize that reported sales prices, unless otherwise allocated between BEV, FF&E and real estate, will include the going concern value of the hotel/motel business.This will result in an overvaluation of the property being appraised for ad valorem tax purposes, since more than the real property will be valued.
Ms. Witte concluded she did not have the market data or a market-derived methodology to make the deduction for BEV and FF&E in the sales comparison analysis.This does not mean that an appraiser need ignore developing the sales comparison approach.When as in this instance, sound sales data is available the approach can and should be developed as Ms. Witte did.However, recognition that the conclusion of value from the sales data values more than the real property must be acknowledged.This is exactly what Complainant’s appraiser did.
It appears Respondent views the reconciliation step of the appraisal process as combining or averaging of the approaches to value developed in the appraisal.The final value determination is not simply an average.There is no mechanical formula for the selection of one indicated value over another.
The following provides a sound general statement governing the final reconciliation of value:
“The final analytical step in the valuation process is the reconciliation of the value indications derived into a value conclusion.Reconciliation occurs within each approach to value, but the final reconciliation occurs at the end of the valuation process.The value conclusion can be expressed as a single number, or as a range of numbers, or as a relationship to come benchmark amount.The nature of the reconciliation depends on the appraisal problem, the approaches that have been used, and the reliability and adequacy of the data used.
“…In the reconciliation section of the report, the appraiser can explain variations among the indications produced by the different approaches and account for differences between the value conclusions and methods applied. … Reconciliation … is not strictly a statistical process but relies upon reexamination of the data and analysis, weighting the indications produced by and the relevance of each of the approaches, and making final determinations in the light of the value definition and the scope of work. … .”
A review of the Final Reconciliation of Value presented by Complainant’s appraiser demonstrates her adherence to the foregoing.Ms. Witte recognized that one single and irrefutable factor, i.e. the indicated sales comparison value included more than just real property, produced an overvaluation of Complainant’s property if she relied on the sales approach.The appraiser did reconcile the two approaches by examining the merits of each and determining that the income approach was the most reliable.
Had the appraiser simply averaged the income approach and sales comparison approach values, this would have been a “failure to properly reconcile” the two approaches.In like manner, if Ms. Witte had concluded the value to be that shown by the sales comparison approach without deducting for both BEV and FF &E the appraisal would not have comported with the purpose of the appraisal, i.e. true value in money of the fee simple estate.Complainant’s real property would have been overvalued.There is no evidence to support a conclusion that the final reconciliation of value by Complainant’s appraiser was in error or constituted a failure to properly reconcile.
Respondent asserted in his post-hearing brief his disagreement with Complainant’s determination of the capitalization rate.No specifics were presented as to why the capitalization rate utilized in the Witte appraisal was in error or not appropriate.The capitalization process is addressed in detail in the Witte appraisal.
The appraiser analyzed the overall rates extracted from the four sales utilized in the sales comparison approach.Ms. Witte recognized that because the sales included not only the real property but also personal property and intangible assets of the hotel operations that the indicated rates established a range but not a given weight for an appropriate overall rate.The range established from the sales was from 7.70% to 10.93%.
Consideration was also given to a mortgage-equity band of investment methodology.A detailed explanation of the process for developing an indicated overall capitalization rate was presented.The rate calculated was 11.2%
Finally, Ms. Witte investigated recognized surveys to determine from those sources what the market data was for an appropriate rate.Rates from these sources ranged from 6.5% to 16.38%.The final conclusion for the capitalization rate relied upon the band of investment with the effective tax rate added to establish the overall rate of 13.282%.
Respondent, although stating his disagreement with the Witte analysis and conclusion, tendered no reason or evidence why the analysis and conclusion was not correct.In the absence of any evidence to the contrary, it is concluded that the rate calculated by Complainant’s appraiser is appropriate for this appraisal problem.
Respondent’s Proposed Income Value – Respondent’s Brief
Respondent’s Brief proposed a valuation of Complainant’s property following Ms. Witte’s calculation of Net Operating Income – Real Estate from page 39 of Exhibit A.Respondent average income and expense figures for 2004, 2005 and 2006, relying on information at pages 71 – 72 of Exhibit A and the 2005 and 2006 data provided in the Income Approach section of Exhibit A.From Respondent’s calculations, applying the overall capitalization rate determined by Ms. Witte, Respondent proposed a value of $2,416,000.
Complainant’s Brief responded to the recalculation of value tendered in Respondent’s Brief.The Respondent’s proposed value of $2,416,000 relying on 2004 – 2006 income and expense data is in error and therefore can be given no probative weight.The valuation calculated in Respondent’s Brief relies on the wrong income data and thereby arrives at a faulty conclusion of value.
Specifically, data on page 71 of Exhibit A to arrive at gross revenue for 2004 was incorrectly utilized.The revenue figure relied on by Respondent drawn from page 71 is the sum of all money received by the subject property and includes money that was paid to reimburse the hotel for funds expended.In other words, pass through funds that are not appropriately included in income or expenses.
Exhibit A does not use the “Sales – Other than Lodging” figures for 2006 and 2007 on page 70 or the analogous “Revenue – Rental” figures for 2004 and 2005 on page 71 to determine the revenue from the restaurant.Rather, Ms. Witte reviewed the leases signed by the restaurant for the 2004 and 2007 years to determine the revenue received from the restaurant.This is appropriate because the only source of income from the restaurant was from the rent paid.Any other income from the restaurant is considered to be a reimbursement for costs paid by the hotel for the restaurant, such as utilities, e.g., and has been deducted from the operating expenses.
The proposed value concluded by Respondent’s Brief overstates the gross revenue by including reimbursements for costs as income to the hotel relying on the 2004 figures.It understates the expenses for the 2004 year by not accounting for the reimbursements erroneously included in the revenue calculation.Since reimbursements for costs paid by the hotel for the restaurant are simply a pass through, they are not to be reflected in either gross revenue or total expenses.Therefore, the averages calculated for both revenue and expenses for 2004 through 2006 in Respondent’s Brief are in error.When the correct room and other revenue figures for 2004, 2005 and 2006 are averaged the resulting stabilized gross revenue is $923,821 not $926,852 as calculated in Respondent’s Brief.In like manner the expenses either as total dollar expenses or as a percentage of revenue are understated.This results in an overstatement of net operating income.
Summary and Conclusion on Complainant’s Valuation
Complainant’s appraiser properly conducted a highest and best use analysis.The determination by Ms. Witte to forego the development of the cost approach did not detract from her valuation in any measure.
The income approach was properly developed in all of its aspects, i.e. income, expenses and overall capitalization rate.The use of 2007 data was not fatally defective.The appraiser’s recapitulation of her income analysis relying on data from years 2003, 2004, 2005 and 2006 at the evidentiary hearing was appropriate in light of the ruling excluding the 2007 data.Complainant’s calculation in its Reply Brief of the income approach utilizing the 2004, 2005 and 2006 data was appropriate in response to Respondent’s argument in his Brief for a valuation based on those years’ data.
The sales comparison approach provided support and validation to the conclusion of value derived from the income methodology.The appraiser’s reconciliation was appropriate in that she correctly determined that the indicated sales comparison value included elements beyond the real estate value and therefore could not properly be relied upon in the present appraisal problem.
The Witte appraisal and testimony constitute substantial and persuasive evidence to rebut the presumption of correct assessment by the Board and to establish a true value in money as of January 1, 2007, of $2,140,000.
Respondent’s Burden of Proof
Respondent, when advocating a value different from that determined by the Board of Equalization, 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.In this case, Respondent elected to challenge the Board’s determination of value by presenting the mass appraisal cost methodology that established the original valuation by the Assessor of $2,753,020.The Board specifically rejected the valuation concluded under the mass appraisal by the Assessor.Given Respondent’s presentation of his valuation of Complainant’s property, as with Complainant’s evidence, it is appropriate that a review, analysis and discussion of the merits of Respondent’s evidence be set forth.
At the outset of analyzing Respondent’s valuation, it is acknowledged that there is no presumption that the Assessor’s original valuation of the property is correct.Respondent’s evidence of value and his resulting opinion must be analyzed in the same manner as the evidence and opinion presented on behalf of Complainant.Notwithstanding narrative comments describing the overall mass appraisal process for Pettis County the opinion of value presented by the Assessor was derived solely from the mass appraisal of the subject property.
Highest and Best Use
Mr. Dohrman included in his appraisal a section headed Highest and Best Use.However, the narrative provided there is simply a general statement as to what is meant by highest and best use.No analysis was presented that concluded a highest and best use either if the property were vacant or as improved.The evidence on the application of a highest and best use analysis on the part of the Assessor is conflicting.
Exhibit 1 makes no conclusion as to highest and best use.The prefiled testimony asserts that the concept of highest and best use was applied in the Assessor’s valuation.However, the testimony as to how it was applied is ambiguous.The explanation of the application of highest and best use by Mr. Dohrman was as follows:
“Considering the age of the structure on the subject property, the location of the subject property in the center of what is perhaps the fastest developing commercial area of Sedalia, Missouri, the proximity of two very new motels, and other factors, I question whether the existing use of the subject property results in maximum productivity.However, for the purposes of my appraisal, I have accepted the Complainant’s position that the existing use of the subject property meets the criteria for highest and best use, and it was considered in the valuation of all property that is subject to this appeal.”
Exhibit 1 provides no market data to indicate that as a vacant (unimproved) property the subject would command a higher value than it would being sold as currently improved and utilized.No market data established that a purchase for demolition of the existing improvements and development of some other commercial structure would result in the maximally productive use of Complainant’s property.Some alternative use of the property as improved was not established by market sources to be either financially feasible or of the maximum productive use.In other words, no evidence was presented to establish that the subject property would have sold for more on January 1, 2007, for the purpose of demolition of the improvements and future development of the site, than it would as improved and continuing to be operated as a hotel.
As has previously been referenced, under cross-examination, Respondent conceded that he had not made a determination of the highest and best use of the property.However, in later cross-examination the Assessor concluded that Complainant’s property would have a higher value if vacant and that the highest and best use would be as vacant land, although the property was not valued as vacant land.
From all of the forgoing, the Hearing Officer concludes no highest and best use analysis was performed in developing Respondent’s cost methodology.This is a critical omission in the appraisal report.As has previously been discussed, a highest and best use analysis is a required element of any sound appraisal.It involves more than simply stating from an authoritative source what is meant by highest and best use.It is conditioned upon appropriate market analysis as was performed by Ms. Witte.
Given Mr. Dohrman’s conclusion that the subject property as improved has a lower value than as a development site, the approach to value that he should have employed was a sales comparison approach relying on sales of comparable vacant land and an negative adjustment for the cost of demolition of the existing improvements.This was not the methodology developed to arrive at true value in money for Complainant’s property by Respondent.
The starting point for developing the cost approach is to establish land value.Land value for the property being appraised is best concluded from sales of comparable vacant tracts, although the market extraction and allocations methods may also be used.Respondent elected to utilize the comparable land sale methodology.Three land sales were presented from which Mr. Dohrman concluded that prime commercial sites were selling for $7.00 per square foot for the first acre.
The sales were for tracts ranging in size from .514 to .996 of an acre.The sales occurred in a range from 2001 to 2006.The per square foot sales prices were: $7.26 – .514 acre – 2006; $6.61 – .556 acre – 2003; and $6.91 – .996 acre – 2001.No adjustments were made to attempt to correlate the $7.00 per square foot value to a per square foot value for the 4.74 acres of the subject.The sales do provide a sound basis to conclude the subject’s first acre could be valued at $7.00 per square foot.
However, the valuation of the subject’s first acre under the Assessor’s mass appraisal does not conform to this valuation.The per square foot value attributed to the subject’s first acre is not $7.00 but only $3.44 ($150,000 ÷ 43,560 = $3.44).No explanation was provided to establish the basis for this -50.8% adjustment.
The remaining 3.74 acres of the subject land was valued at $1.72 ($280,500 ÷ 162,914.40 = 1.72) per square foot.The overall per square foot value concluded for the Complainant’s land for purpose of Respondent’s cost approach calculates to $2.09 ($430,500÷ 206,474.40 = $2.09). No evidence was presented from which the Hearing Officer can determine the basis for these valuations.Since the conclusion of land value of $2.09 per square foot is not supported by a statement of the facts upon which it is based and an explanation of how it was developed it must be rejected.”
Respondent valued the subject improvements at $2,322,520.The valuation was under the mass appraisal cost system employed by the Pettis County Assessor’s Office. The Vanguard cost manual was utilized to establish replacement costs new for the subject improvements.The replacement cost new for all improvements totaled $3,484,642.A physical depreciation factor of 30% was applied to all improvements.A factor of 10% for functional obsolescence was applied to all improvements.A 30% economic obsolescence factor was applied to a portion of the subject building.
No discussion was presented as to how the various depreciation factors were determined.A narrative explanation of why depreciation was applied and the methods employed for determining depreciation should be a part of a sound cost approach.The proper application of depreciation is a critical factor in the development of the cost approach.Depreciation is the difference between the contributory value of the improvements and the cost of the improvements at the time of appraisal.
In light of the income and expense data on the subject property, the depreciation applied under the mass appraisal cost methodology was understated.This resulted in an overvaluation of Complainant’s property.Assuming, without finding, the land value for the subject property to be $430,500 as proffered by the Property Record Card, the value of the improvements based on the value concluded from the income approach would be only $1,709,500 ($2,140,000 – $430,500 = 1,709,500).Therefore, the depreciation factor from all sources, i.e. physical functional and economic, would be .509419 ($1,775,142) not the factor of only .333498 ($1,162,122) applied under the mass appraisal cost system.
Addendums 3 & 4 – Hotel Comparable
Respondent included in his appraisal report the property record card and photographs of the State Fair Best Western Hotel, located at 3120 S. Limit, Sedalia, Missouri.Since this property had not recently sold, it provided no evidence under a sales comparison analysis.Demonstrating that another hotel property was valued under the mass appraisal costing system like the subject is not relevant in the present case.To the extent that Respondent presented this information to establish an equitable approach to valuing the two hotels, it was unnecessary. Equity in the assessment process is achieved by arriving at the true value in money.
Failure to Perform Income Approach
Although Respondent included a general description of the Income Approach in his appraisal, he elected to forgo the development of this critical methodology for the valuation of the subject hotel.The reason provided in Exhibit 1 for not conducting the income approach was “insufficient income data existed to provide objective analysis.”Through the discovery process Respondent should have obtained the relevant income and expense data on the subject property.This data provided sufficient and relevant data to properly perform the income approach to value.
As addressed above, this is the methodology most appropriate for valuation of a hotel/motel property.It provides the indicated value based upon the information that an informed purchase would consider.The omission of presenting this approach mandates that no probative weight may be accorded Respondent’s opinion of value.
Summary and Conclusion on Respondent’s Valuation
The omission of a highest and best use analysis was a critical defect in Respondent’s approach to this appraisal problem.The presentation of the mass appraisal costing methodology to establish Respondent’s value for Complainant’s property was flawed by the failure to properly develop and substantiate the land value for the property.The methodology was further compromised by applying depreciation factors with no demonstrated and established market basis.The subject property’s income stream established that the depreciation applied was understated even assuming the land value and replacement cost new figures were reflective of the market.Respondent’s total reliance upon the mass appraisal costing methodology coupled with the failure to perform the income approach to value was a fatal shortcoming in the appraisal of Complainant’s property.Accordingly, Exhibits 1 and 2 failed to rebut the presumption of correct assessment by the Board and establish the true value in money to be $2,753,020.
The assessed valuation for the subject property as determined by the Board of Equalization for Pettis County for the subject tax day is SET ASIDE.
The commercial assessed value for the subject property for tax year 2008 is set at $684,800.
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, MO65102-0146, and a copy of said application must be sent to each person at the address listed below in the certificate of service.
The Collector of Pettis 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 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 August 18, 2009.
STATE TAX COMMISSION OFMISSOURI
W. B. Tichenor
Senior Hearing Officer
Certificate of Service
I hereby certify that a copy of the foregoing has been mailed postage prepaid on this 18thday of August, 2009, to:Stanley Cox and Daniel Baker, 202West Fourth Street, Sedalia, MO 65301, Attorneys for Complainant; Jeff Mittelhauser, Prosecuting Attorney, 415 South Ohio, Sedalia, Mo 65301, Attorney for Respondent; Dean Dohrman, Assessor, Pettis County Courthouse, 415 S. Ohio, Sedalia, MO 65301; Pam Doane, Clerk, Pettis County Courthouse, 415 S. Ohio, Sedalia, MO 65301; Robert Leftwich, Collector, Pettis County Courthouse, 415 S. Ohio, Sedalia, MO 65301.
 Hermel, Inc. v. STC, 564 S.W.2d 888, 895 (Mo. banc 1978); Chicago, Burlington & Quincy Railroad Co. v. STC, 436 S.W.2d 650, 656 (Mo. 1968); May Department Stores Co. v. STC, 308 S.W.2d 748, 759 (Mo. 1958).
 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); See Also, Exhibit A, p. 8 – Definition of True Value in Money.
 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).
 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; Exhibit 1, p. 8.
 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).
 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).
 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. Div. 2 1974).
 Hotels and Motels – A Guide to Market Analysis, Investment Analysis and Valuations, Stephen Rushmore, MAI, Appraisal Institute, 1997, p. 214;See also, Encyclopedia of Real Estate Appraising, Third Edition, Edith J. Friedman, Prentice Hall, 1978, p. 642.
 Exhibit B, Q & A 22 – “The cost approach is not relied upon in developing an opinion of true value in money because estimates of accrued depreciation, including physical, functional, and external obsolescence, are difficult to develop with limited sales from the local market.”
 Section 490.065, RSMo; State Board of Registration for the Healing Arts v. McDonagh, 123 S.W.3d 146 (Mo. SC. 2004); Courtroom Handbook on Missouri Evidence, Wm. A. Schroeder, Sections 702-505, pp. 325-350; Wulfing v. Kansas City Southern Industries, Inc., 842 S.W.2d 133 (Mo. App. E.D. 1992).
 See, Westwood Partnership v. Gogarty, 103 S.W.3d 152 (Mo. App. E.D. 2003); Daly v. P. D. George Co., 77 S.W.3d 645 (Mo. App. E.D. 2002); Reeves v. Snider, 115 S.W.3d 375 (Mo. App. S.D. 2003).Industrial Development Authority of Kansas City v. State Tax Commission of Missouri, 804 S.W.2d 387, 392 (Mo. App. 1991).
 Highest and Best Use encompasses use of the property that is physically possible, legally permissible, financially feasible and maximally productive.Exhibit A, p. 31; See Also, The Appraisal of Real Estate – The Four Tests, pp. 278 – 281.
 Respondent testified, “… for purposes of my appraisal, I have accepted the Complainant’s position that the existing use of the subject property meets the criteria for highest and best use, and it was considered in the valuation of all property that is subject to this appeal.”Exhibit 2, Q & A 17.
 12 CSR 30-3.065 (1) (B) 1; Hotels and Motels – A Guide to Market Analysis, Investment Analysis and Valuations, Stephen Rushmore, MAI, Appraisal Institute, 1997, p. 214 – 236; Encyclopedia of Real Estate Appraising, Third Edition, Edith J. Friedman, Prentice Hall, 1978, p. 642 – 646.