HSB Hospitality Group v. Dohrman (Pettis)

State Tax Commission of Missouri

 

HSB HOSPITALITY GROUP LLC,)

)

Complainant,)

)

v.)Appeal Number 09-77500

)

DEAN DOHRMAN, ASSESSOR,)

PETTIS COUNTY, MISSOURI,)

)

Respondent.)

 

 

ORDER

AFFIRMING HEARING OFFICER DECISION

UPON APPLICATION FOR REVIEW

 

On August 26, 2010, Hearing Officer Maureen Monaghan entered her Decision and Order (Decision) setting aside the assessment by the Pettis County Board of Equalization for 2009 at $2,075,575, true value in money, commercial assessed value of $664,185.

Complainant filed an Application for Review of the Decision.

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 the owner 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 or owners who testify on the issue of reasonable value, but may believe all or none of the expert’s or owner’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

Errors Alleged

Complainant alleges the Hearing Officer erred in finding a revenue per available room (RevPar) of $19.22 rather than $17 as advocated by the Complainant and the Complainant’s expert.

Finding Revenue

Complainant’s appraiser selected a $17 per available room revenue due to loss of the Ramada Inn Franchise as well as economic conditions and increased competition (Ex. A, p 22, ¶1, l 6-7).The Complainant’s appraiser then assumed the property would operate under a franchise affiliation and included franchise fees and PIP in expenses.

Review of the hotel’s historic income indicates a six year average room revenue of$19.22 (years 2003 – 2008) (Ex. A, p 21).A weighted 4 year average is $18.19.The hotel was franchised in the years 2003 to 2006.The revenues per room during those years were $19.32, $18.90, $21.25 and $22.33 respectively.Revenues in 2007 and 2008 were $18.07 and $15.45.

Korpacz reported per room income of $29.55 – $30.03 (Ex A, p 21).

Conclusion

A review of the record in the present appeal provides support for the determination made by the Hearing Officer.Review of historic revenues, comparison of the subject’s revenue with and without franchise affiliation, and Korpacz reported per room income for economy segment of hotels, indicate that a finding of $19.22 revenue per available room would not be arbitrary or capricious.

There is competent and substantial evidence to establish a sufficient foundation for the Decision of the Hearing Officer.A reasonable mind could have conscientiously reached the same result based on a review of the entire record. The Commission finds no basis to support a determination that the Hearing Officer acted in an arbitrary or capricious manner or abused her discretion as the trier of fact and concluder of law in this appeal.[4]

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 Pettis 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 December 2, 2010.

STATE TAX COMMISSION OF MISSOURI

Bruce E. Davis, Chairman

Jeff W. Schaeperkoetter, Commissioner

 

 

 

 

DECISION AND ORDER

 

HOLDING

 

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 2009 is set at $2,075,575, commercial assessed value of $664,185.Complainant appeared by Counsel Daniel Baker, Cox & Associates, LLC, Sedalia, Missouri.Respondent appeared by Prosecuting Attorney Jeff Mittelhauser.Case heard and decided by Hearing Officer Maureen Monaghan.

ISSUE

The Commission takes this appeal to determine the true value in money for the subject property on January 1, 2009.

SUMMARY

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 $2,936,410, assessed value of $939,650, as commercial property.The Board reduced the true value in money to $2,558,420, assessed value of $818,695.Complainant proposed a value of $2,000,000, assessed value of $640,000.[5]A hearing was conducted on July 12, 2010, at the Pettis County Courthouse, Sedalia, Missouri.Complainant’s Brief was received by the Commission on August 6, 2010.Respondent’s Brief was received by the Commission on August 10, 2010.Complainant’s Reply Brief was received by the Commission on August 19, 2010.

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 Truman Inn.[6]

3.Construction and Improvements.There was evidence of construction January 1, 2009, to January 1, 2010.Although the Complainant’s counsel argued that the construction was de minimus and what little construction occurred added no value to the property, the Assessor issued a notice of increased assessment to the Complainant for 2010.Neither party’s expert was prepared to testify as to whether the construction changed the value of the subject property.Accordingly, the value determined for the Complainant’s property at this hearing was for the 2009 assessment year only.

4.State Tax Commission Decision.Complainant appealed his assessment for 2008.In HSB Hospitality v. Dohrman, STC 08-77500(August 18, 2009), the hearing officer determined the true market value of the subject property as of January 1, 2007, was $2,140,000.

5.Complainant’s Evidence.

Witnesses:

Witness	Description
Allan Moore	Missouri Certified General Appraiser
Bhupenota “Bob” Bhakta	Agent for Hotel
Robert Ehler	Expert for Assessor

 

Exhibits:

Exhibit	Description
A	Appraisal
B	Written Direct Testimony of Allan Moore
C	Room Layout – Excluded as to valuation for 2009
D	Map

 

6.Respondent’s Evidence.

Witnesses:

Witness	Description
Dean Dohrman	Assessor
Robert Ehler	Missouri Certified General Appraiser

 

Exhibits:

Exhibits	Description
1	Appraisal
2	Amended Written Direct Testimony Dean Dohrman
3	Written Direct Testimony of Robert Ehler

 

7.Income

Complainant’s appraiser used a $17 x 42,340 available room nights due to loss of franchise as well as economic conditions and increased competition. The six year average for the subject property is $19.22. A weighted 4 year average is $18.19.Korpacz reported per room income of $29.55 – $30.03.

The appraiser used a lower per room rate due to loss of franchise, but included in his expenses the cost of franchise and PIP costs for re-establishing franchise flag. The appraiser should have determined the income and expenses based on either having a franchise or not having a franchise.Basing expenses on having a franchise but income based upon loss of franchise is not appropriate.

Re-establishing the franchise flag, would not only increase the expenses, but would increase the income since the purpose of re-establishing franchising flag would be to take advantage of franchise bookings, etc.Assuming a franchise affiliation with reservation support, the income should, at minimum, match the average income.Therefore, the income is calculated at: 42,340 available room nights x $19.22= $816,096.

Restaurant income average from 2003-2006 is $48,823; the average income of 2005 to 2008 is $36,750. However, over the past three years the income from the restaurant has been $31,500 per year.The actual income from the restaurant is appropriate to use.

8.Furniture, Fixtures and Equipment

Return of Personal Property: Periodic replacement of furniture, fixtures and equipment is essential to maintain the quality, image, and income potential of a lodging facility.An appraisal should reflect these expenses in the form of an appropriate reserve for replacement.Industry experience indicates that a reserve for replacement of 3% to 5% of revenue.Complainant’s expenses include a deduction for the periodic replacement of furniture, fixtures, and equipment providing for the return of personal property of 3% and are deemed appropriate for a limited service facility.

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.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 the reasonable rate of return.The appraiser used the value of personal property determined by the Assessor in the 2009 assessment cycle and applied the capitalization rate for a deduction of $29,626.

9.Expenses

Appraiser for the Complainant determined the expenses using a four year average of the expenses for the property – 48.8%.Other expenses include a franchise fee of 5.3% which is calculated from the three year average when the property was under a franchise agreement. He included an owner/management fee of 1% and insurance fee of 6%.The total expenses equal 64.1% which the appraiser rounded up to 65% due to industry forecasting increase in all of the described expenses.

10.Capitalization Rate

The appraiser for the Complainant concluded on a capitalization rate of 10.6% using band of investment.Korpcz Real Estate Investor Survey indicated the cap rates for limited service lodging ranged from 6.5% to 14.0%The effective tax rate for the property is 2.104%.

11.True Value in Money

Room Revenue (4 year average) if considering the franchise, income will go up.	$816,096
Rental Revenue (3 year average) may go up with hotel income increasing with franchise	$31,500
Gross Revenue	$847,596
Less expenses at 65% (48.8% for departmental and undistributed expenses, 5.3% for franchise fees, 1% for mgmt, 6% for insurance – average, 3% reserves for replacement)	($550,937)
Net Operating Income	$296,659
Return on FF&E	($26,626)
	$270,033
Cap Rate	.12704
	$2,125,575
Less Curable obsolescence – refurbish for franchise – PIP	($50,000)
2009 Value	$2,075,575

 

Complainant’s evidence was substantial and persuasive to rebut presumption of correct valuation by the Board of Equalization.True value in money for subject property for 2009 is $2,075,575.

CONCLUSIONS OF LAW AND DECISION

Jurisdiction

The Commission has jurisdiction to hear this appeal and correct any assessment which is shown to be unlawful, unfair, arbitrary or capricious.The hearing officer shall issue a decision and order affirming, modifying or reversing the determination of the board of equalization, and correcting any assessment which is unlawful, unfair, improper, arbitrary, or capricious.[7]

Presumptions In Appeals

There is a presumption of validity, good faith and correctness of assessment by the CountyBoardof Equalization.[8]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.[9]Complainant’s evidence met the standard to rebut the presumption of correct assessment.The exhibits and witness testimony presented provided sufficient information for the Hearing Officer to find value.

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.[10]True value in money is defined in terms of value in exchange and not value in use.[11]It is the fair market value of the subject property on the valuation date.[12]Market value is the most probable price in terms of money which a property should bring in competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeable and assuming the price is not affected by undue stimulus.

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

1.Buyer and seller are typically motivated.

 

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

 

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

 

4.Payment is made in cash or its equivalent.

 

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

 

6.The price represents a normal consideration for the property sold unaffected by special financing amounts and/or terms, services, fees, costs, or credits incurred in the transaction.[13]

 

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.[14]

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.[15]

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.[16]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.[17]

Income Approach Appropriate for Present Appraisal Problem

The strongest and most compelling approach to value for the subject property 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.”[18]

 

Sales Approach Appropriate to Substantiate Value

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.The sales comparison approach provides substantiation for the 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.”[19]

 

The subject hotel was built in 1973.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.[20]

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.[21]

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, 2009.[22]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.”[23]

Substantial evidence can be defined as such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.[24]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.[25]

Complainant’s Valuation

Complainant’s appraiser properly conducted a highest and best use analysis.The determination by Mr. Moore to forego the development of the cost approach did not detract from his valuation in any measure.

The income approach was properly developed in all of its aspects, i.e. income, expenses and overall capitalization rate.

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 he 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.

Respondent’s Valuation

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.[26]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.[27]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.The opinion of value presented by the Assessor was derived solely from the mass appraisal of the subject property.

Mass Appraisal

Respondent set forth his process of appraisal.[28]Respondent used a mass appraisal approach to determine the true value for the subject property in this appeal.Respondent states in his appraisal that “mass appraisal utilizes the three approaches to value: cost approach, sales comparison approach, and income approach…The process of mass appraisal for 2009 in Pettis County, Missouri actually began in 2008.Index studies compared cost and sales prices to the appraised results…The cost manual, developed by Vanguard Appraisals, Inc., provided the basis for the initial calculation of cost approach.Sales analysis and economic analysis provided a check and modification for the income and sales comparison approaches.Reconciliation of the three approaches produced the estimated values.”[29]

“Simply stated, single-property appraisal is the valuation of a particular property as of a given date; mass appraisal is the valuation of many properties as of a given date.” [30]

“Assessors need skills in both mass appraisal and single-property appraisal, skills in mass appraisal to produce the initial values in a reappraisal and in single-property appraisal to defend assessed values within the courts and to appraise special purpose properties not easily value by mass appraisal.”[31]

Both Dohrman and Ehler value hotels properties under mass appraisal system and hold expertise of valuing commercial properties using mass appraisal systems.Ehler stated that he would put most weight on the sales comparable approach.

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 methodology for the valuation of the subject hotel.The reason provided in Exhibit 1 for not conducting the income approach was insufficient “income data had not been provided by the hotel or restaurant industry to conduct an objective analysis of the income approach.”Through the use of authoritative sources for hotel and restaurant income and expenses such as Korpacz, Respondent should have obtained the relevant income and expense data.

As addressed above, the income approach 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.

Section 137.345.5, RSMo

“In every instance where a taxpayer has appealed to the board of equalization or the state tax commission the assessment of the taxpayer’s property, real or personal, and that appeal has been successful, then in the next following and all subsequent years the basis upon which the assessor must base future assessments of the subject property shall be the basis established by the successful appeal and any increases must be established from that basis.”

 

Complainant appealed in 2008.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.The case was heard by the State Tax Commission who ordered the true value in money for the subject property for tax year 2008 be set at $2,140,000, commercial assessed value of $684,800.The decision was issued in August 2009;three months after the Assessor determined the valuation of properties within the county for 2009 and turned over the books.The Assessor did not have the benefit of the Commission’s decision when valuing the property for 2009.

Summary and Conclusion on Respondent’s Valuation

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.

ORDER

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 2009 is set at $664,185.

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.

Failure to state specific facts or law upon which the appeal is based will result in summary denial. [32]

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 26, 2010.

STATE TAX COMMISSION OFMISSOURI

Maureen Monaghan

Hearing Officer