Joe & Loretta Scott Trustees v. Linda Wagner, Ste. Genevieve Co. Assessor

July 2nd, 2014

State Tax Commission of Missouri

JOE & LORETTA SCOTT, )
)
Complainants, )
)
v. ) Appeal Number 11-84555
)
LINDA WAGNER, ASSESSOR, )
STE GENEVIEVE COUNTY, MISSOURI, )

)
)
Respondent. )

 

ORDER SETTING ASIDE HEARING OFFICER DECISION

UPON APPLICATION FOR REVIEW

 

On July 2, 2014, Hearing Officer Maureen Monaghan issued her order setting aside the value placed upon the subject property by the Ste. Genevieve County Board of Equalization and finding the correct value to be $746,000 (commercial assessed value $238,720) as proposed by Complainant.  Respondent applied for the Commissioners to review the decision.

Both parties found that the cost approach was the appropriate way to value the property.  The difference in value arises in the calculation of depreciation.  Respondent’s appraiser found only physical depreciation.  Complainant’s appraiser found that the property suffered from physical, functional and external obsolescence.

The Commissioner finds the property to suffer from physical and functional obsolescence.  The true value of the property as of January 1, 2011 is $1,200,000, a commercial assessed value of $384,000.

 

Standard Upon Review

A party subject to a Decision and Order of a hearing officer with the State Tax Commission may file an application requesting the case be reviewed by the Commission.  The Commission may then summarily allow or deny their request.  The Commission may affirm, modify, reverse or set aside the decision.  The Commission may take any additional evidence and conduct further hearings.

Issues

Respondent appealed raising the following issues:

  1. The Decision and Order’s Findings of Fact are not supported by competent and substantial evidence on the whole record and are contrary to the finds on the same facts in the companion case tried at the same time.

 

  1. The Decision and Order’s ruling that external obsolescence can be measured by sales of non-comparable properties is a violation of recognized appraisal methodology and an error of law.

 

  1. The Decision and Order’s ruling that functional obsolescence can be measured by sales of non-comparable properties is a violation of recognized appraisal methodology and an error of law.

 

FINDINGS OF FACT

  1. Jurisdiction. Jurisdiction over this appeal is proper.  Complainant timely appealed to the State Tax Commission from the decision of the St. Genevieve County Board of Equalization.
  2. Evidentiary Hearing. The Evidentiary Hearing was held on December 4 and 5, 2013 in Ste. Genevieve, Missouri.  The final briefs in the appeal were filed on June 2, 2014.
  3. Identification of Subject Property. The subject property is identified by map parcel number 17-7.0-036-00-000-0007.01.  It is further identified as 13326 State Route F, Ste Genevieve, Missouri.
  4. Description of Subject Property. Subject property is approximately 6 acres with several improvements currently being used as a brewery, distillery, soda production plant, restaurant and bar, and retail sales.  The property was originally used as a school built in 1956.   The current owners purchased the property in 1994 from the school district.  A warehouse was added to the property in 2004.  Their first use of the property was as an antique mall.  In 2008, the entire property was converted into a brewery, distillery, soda production plant, as well as a restaurant and bar.
  5. Brewery – 7,544 square foot masonry building which was formerly a school building. The building retains the central hallway with classrooms off the hallway.  The brewery is in a larger area of the school building that probably served as a gymnasium or auditorium.  Most of the class rooms are not being used; one of the rooms is used as the lab for the brewery.
  6. Restaurant – 5,880 square foot frame building. The building is used as a bar and restaurant.
  7. Distillery – 6240 square foot frame building. The building has no finished areas; it contains the distillery, bottling equipment and a walk-in cooler.
  8. Warehouse – 7,680 square foot warehouse.
  9. Garage – 396 square foot frame structure with a walkout basement.
  10. Other improvements – The outdoor patio is 3,180 square foot pole frame structure with a roof and concrete floors.  There is a fire pit, walkways and roadways between buildings, and paved parking for over 100 vehicles.
  11. Assessment. The Assessor appraised the property at $1,688,646, an assessed commercial value of $540,370.  The Board of Equalization sustained the assessment.
  12. Complainant’s Evidence. Complainant offered the following Exhibits which were admitted into evidence:
Exhibit Description
A Appraisal Report of Howard Ausley – $746,000
B Extract from Marshall & Swift
C Written Direct Testimony of Howard Audsley
D Written Direct Testimony of Joe Scott
E Rebuttal Exhibit 2010-2011 Annual Report of Mo. Div. of Tourism

 

Respondent objected to admission to Exhibit A.  Objections were taken under advisement and ruled upon on October 11, 2013.  Respondent’s objection was overruled.

  1. Respondent’s Evidence. Respondent offered the following Exhibits which were admitted into evidence:
Exhibit Description
1 Written Direct Testimony Robert Bruns
2 Appraisal Report of Robert Bruns $1,853,000
3 Written Direct Testimony Edward Boyer
4 EA Boyers Estimate #48
5 Written Rick Schaeffer
6 CV Rick Schaeffer
7 Federal Depreciation Table
8 Howard Audsley Appraisal #1 – Brewery
9 Howard Audsely Appraisal #1 – Winery
10 Howard Audsely Appraisal #2 – Winery
11 Rebuttal Testimony of Robert Bruns

 

Complainant objected to admission to Exhibits 1-4.  Objections were taken under advisement and ruled upon on October 11, 2013.  Complainant’s objections were overruled.

  1. No Evidence of New Construction & Improvement.  There was no evidence of new construction and improvement from January 1, 2011, to January 1, 2012, therefore the assessed value for 2011 remains the assessed value for 2012. (Section 137.115.1 RSMo)
  2. Presumption of Correct Assessment Rebutted – Value Established by the Commission.  The Commission makes the following findings for determination of value:

a) Replacement Cost New                     $2,400,000;

b)Physical Depreciation (20%)               ($  480,000);

$1,920,000

c)Functional Obsolescence (40%)          ($  768,000);

Value of Improvements                      $1,152,000

d)Value of Land                                     $     30,000

Total Value of Subject Property         $1,182,000

Say      $1,200,000

DISCUSSION AND RULING

Comparison to the Companion Appeal – 11-84556

            In Crown Diversified Industries Corp. v. Linda Wagner, Appeal No. 11-84556 (July 3, 2014), the Hearing Officer determined that Complainant used inappropriate comparables to calculate functional and external obsolescence.  In that case, the property under appeal was a winery.  The improvements include a 40,000 square foot winery and a 3,750 pavilion constructed in 2002 for use as a winery and tourist center.  The Hearing Officer rejected Complainant’s use of  light commercial or industrial buildings as comparables to determine market extraction obsolescence adjustments finding that the market extraction approach required using properties “with physical, functional and external characteristics which were similar to the subject and have incurred similar amounts of depreciation”.  She found that Complainant’s proposed market extraction comparables were not similar to the subject property in age, attributes or utility.

In this appeal, the improvements consist of a school building built in 1956 and a warehouse built in 2004.  The improvements were used as a flea market/antique mall before being converted into a brewery, distillery, soda production plant, restaurant and bar in 2008.  Generic second generation light commercial and industrial buildings are more likely to suggest market obsolescence for the subject property than for custom built winery in appeal number 11-84556.  The fact that the comparables were rejected in one appeal does not rule out their use for a different appeal.

The Hearing Officer erred in that the Findings of Fact (true value) were not supported by competent and substantial evidence in that the determinations of obsolescence were not supported by the evidence.

 

Valuing a property constructed for use as a school and now used as a brewery, distillery, soda production plant, restaurant, bar, and retail sales is an atypical appraisal assignment and a challenging undertaking.  Both appraisers concede that due to the insufficiency of data, the sales comparison and the income approaches cannot develop an indication of value as the data necessary to perform such is lacking.  Both appraisers relied on the cost approach to opine a value for this unique property.

The cost approaches developed by the appraisers were similar in land value, replacement cost new and physical depreciation.    The determination of replacement cost new was within 4% of each other and within 12% after reviewing their physical depreciation.  A review of both appraisals and their support for adjustments, the Commission finds that replacement cost new after physical depreciation is $1,920,000.

The Commission now considers the functional and external obsolescence determinations of the appraisers.  External obsolescence is a defect in the property caused by negative influences outside the subject property.  The Respondent’s appraiser did not make any deduction for external obsolescence.  The property has no natural or artificial barriers, it has good access to major roadways, and the scenic nature of the property is attractive to tourist.  The Complainant’s appraiser made a 40% adjustment to the cost approach after review of sales of properties.  The properties used to make such calculations were not comparable and therefore do not equate to substantial and persuasive evidence. Further the appraiser did not articulate the specific defects and negative influences impacting the property thereby establishing the external obsolescence.  The Commission does not find evidence to establish external obsolescence.

The Commission does find functional obsolescence.  Subject property is a former school currently being used as a brewery, distillery, soda production plant, restaurant and bar, and retail sales.  The Commission recognizes that there would be some functional obsolescence converting a school into a manufacturing facility.  There is no dispute that most of the “class room” portion of the old school was not being utilized.  The Complainant’s appraiser found 65% functional obsolescence as to the school building and 30% functional obsolescence as to the remaining improvements.  The school building represents 25% of the total square footage of the improvements.  Using a weighted average for the functional obsolescence, Commission finds that an overall adjustment of 40% for functional obsolescence is deemed appropriate.

ORDER

The Decision and Order of the Hearing Officer is SET ASIDE.  The Commission finds the true value of the property as of January 1, 2011 to be $1,200,000 or an assessed commercial value of $384,000.

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  St. Genevieve 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 this 14th day of April, 2015.

 

STATE TAX COMMISSION

 

Bruce E. Davis, Chairman

Randy B. Holman, Commissioner

Victor Callahan, Commissioner

 

Certificate of Service

 

I hereby certify that a copy of the foregoing has been mailed postage prepaid on this14th    day of April, 2015, to:

 

James P. Gamble, Attorney for Complainants, 231 South Bemiston Avenue, Suite 1111, St. Louis, Missouri  63015

Richard D. Reed, Lewis, Reed & Allen, P.C., Attorney for Respondent, 136 East Michigan Avenue, Suite 800, Kalamazoo, Michigan 49007

Linda Wagner, Ste. Genevieve County Assessor, 55 S. Third St., Ste. Genevieve, MO 63670

Kay Basler, Ste. Genevieve County Clerk 55 South Third St., Ste. Genevieve, MO 63670

Phyllis Vessell Ste. Genevieve County Collector 55 S. Third Ste. Genevieve, MO 63670.

 

 

Jacklyn Wood

Legal Coordinator

 

State Tax Commission of Missouri

 

JOE & LORETTA SCOTT, Trustees, )
)
Complainants, )
)
) Appeal Number 11-84555
)
LINDA WAGNER, ASSESSOR, )
STE GENEVIEVE COUNTY, MISSOURI, )
)
)

 

DECISION AND ORDER

 

HOLDING

 

Decision of the County Board of Equalization sustaining the assessment made by the Assessor is SET ASIDE. Complainants presented substantial and persuasive evidence to rebut the presumption of correct assessment by the Board of Equalization.

True value in money for the subject property for tax years 2011 and 2012 is set at $746,000, commercial assessed value of $238,720.

Complainant appeared in person and by counsel James Gamble

Respondent appeared in person and by counsel Richard Reed.

Case heard and decided by Maureen Monaghan, Hearing Officer.

ISSUE

Complainant appeals, on the ground of overvaluation, the decision of the Ste. Genevieve County Board of Equalization, which sustained the valuation of the subject property. The Commission takes this appeal to determine the true value in money for the subject property on January 1, 2011.

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 St. Genevieve County Board of Equalization.
  2. Evidentiary Hearing. The Evidentiary Hearing was held on December 4 and 5, 2013 in Ste. Genevieve, Missouri. The final briefs in the appeal were filed on June 2, 2014.
  3. Identification of Subject Property. The subject property is identified by map parcel number 17-7.0-036-00-000-0007.01. It is further identified as 13326 State Route F, Ste Genevieve, Missouri.
  4. Description of Subject Property. Subject property is approximately 6 acres with several improvements currently being used as a brewery, distillery, soda production plant, restaurant and bar, and retail sales. The property was originally used as a school built in 1956. The current owners purchased the property in 1994 from the school district. A warehouse was added to the property in 2004. Their first use of the property was as an antique mall. In 2008, the entire property was converted into a brewery, distillery, soda production plant, as well as a restaurant and bar.

a. Brewery – 7,544 square foot masonry building which was formerly a school building. The building retains the central hallway with classrooms off the hallway. The brewery is in a larger area of the school building that probably served as a gymnasium or auditorium. Most of the class rooms are not being used; one of the rooms is used as the lab for the brewery.

b.   Restaurant – 5,880 square foot frame building. The building is used as a bar and restaurant.

c.   Distillery – 6240 square foot frame building. The building has no finished areas; it contains the distillery, bottling equipment and a walk-in cooler.

d. Warehouse – 7,680 square foot warehouse.

e. Garage – 396 square foot frame structure with a walkout basement.

f. Other improvements – The outdoor patio is 3,180 square foot pole frame structure with a roof and concrete floors. There is a fire pit, walkways and roadways between buildings, and paved parking for over 100 vehicles.

  1. Assessment. The Assessor appraised the property at $1,688,646, an assessed commercial value of $540,370. The Board of Equalization sustained the assessment.
  2. Complainant’s Evidence.   Complainant offered the following Exhibits which were admitted into evidence:
Exhibit Description
A Appraisal Report of Howard Ausley – $746,000
B Extract from Marshall & Swift
C Written Direct Testimony of Howard Audsley
D Written Direct Testimony of Joe Scott
E Rebuttal Exhibit 2010-2011 Annual Report of Mo. Div. of Tourism

 

Respondent objected to admission to Exhibit A. Objections were taken under advisement and ruled upon on October 11, 2013. Respondent’s objection was overruled.

  1. Respondent’s Evidence. Respondent offered the following Exhibits which were admitted into evidence:
Exhibit Description
1 Written Direct Testimony Robert Bruns
2 Appraisal Report of Robert Bruns $1,853,000
3 Written Direct Testimony Edward Boyer
4 EA Boyers Estimate #48
5 Written Rick Schaeffer
6 CV Rick Schaeffer
7 Federal Depreciation Table
8 Howard Audsley Appraisal #1 – Brewery
9 Howard Audsely Appraisal #1 – Winery
10 Howard Audsely Appraisal #2 – Winery
11 Rebuttal Testimony of Robert Bruns

 

Complainant objected to admission to Exhibits 1-4. Objections were taken under advisement and ruled upon on October 11, 2013. Complainant’s objections were overruled.

  1. No Evidence of New Construction & Improvement. There was no evidence of new construction and improvement from January 1, 2011, to January 1, 2012, therefore the assessed value for 2011 remains the assessed value for 2012. (Section 137.115.1 RSMo)
  2. Presumption of Correct Assessment Rebutted – Value Established. The evidence presented by Complainant was substantial and persuasive to both rebut the presumption of correct assessment by the Board and to establish the fair market value of the subject property to be $746,000, assessed commercial value of $238,720.

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. Article X, Section 14, Mo Const. of 1945; Sections 138.430 and 138.431 RSMo.

Basis of Assessment

            The Constitution mandates that real property and tangible personal property be assessed at its value or such percentage of its value as may be fixed by law for each class and for each subclass. Art. X, Section 4(a) and (b), Mo. Const. The constitutional mandate is to find the true value in money for the property under appeal. By statute real and tangible personal property is assessed at set percentages of true value in money. Section 137.115.5 RSMo.

Presumption In Appeal

There is a presumption of validity, good faith and correctness of assessment by the County Board of Equalization. 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)

The presumption of correct assessment is rebutted when the taxpayer presents substantial and persuasive evidence to establish that the Board’s valuation is erroneous and the fair market value of the property. Hermel, supra; Cupples-Hesse Corporation v. State Tax Commission, 329 S.W.2d 696, 702 (Mo. 1959)

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. St. Joe Minerals Corp. v. State Tax Commission, 854 S.W.2d 526, 529 (Mo. App. E.D. 1993); Missouri Baptist Children’s Home v. State Tax Commission, 867 S.W.2d 510, 512 (Mo. banc 1993) True value in money is defined in terms of value in exchange and not value in use. Daly v. P. D. George Company, et al, 77 S.W.3d 645, 649 (Mo. App E.D. 2002), citing, Equitable Life Assurance Society v. STC, 852 S.W.2d 376, 380 (Mo. App. 1993); citing, Stephen & Stephen Properties, Inc. v. STC, 499 S.W.2d 798, 801-803 (Mo. 1973) It is the fair market value of the subject property on the valuation date. Hermel, supra. Market value is the most probable price in terms of money 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.

 

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

 

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

 

  1. Payment is made in cash or its equivalent.

 

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

 

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

 

Real Estate Appraisal Terminology, Society of Real Estate Appraisers, Revised Edition, 1984; See also, Real Estate Valuation in Litigation, J. D. Eaton, M.A.I., American Institute of Real Estate Appraisers, 1982, pp. 4-5; Property Appraisal and Assessment Administration, International Association of Assessing Officers, 1990, pp. 79-80; Uniform Standards of Professional Appraisal Practice, Glossary.

 

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. St. Louis County v. Security Bonhomme, Inc., 558 S.W.2d 655, 659 (Mo. banc 1977); St. Louis County v. STC, 515 S.W.2d 446, 450 (Mo. 1974); Chicago, Burlington & Quincy Railroad Company v. STC, 436 S.W.2d 650 (Mo. 1968)

The Hearing Officer as the trier of fact may consider the testimony of an expert witness and give it as much weight and credit as 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. 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)

Methods of Valuation

Proper methods of valuation and assessment of property are delegated to the Commission. It is within the purview of the Hearing Officer to determine the method of valuation to be adopted in a given case. See, Nance v. STC, 18 S.W.3d 611, at 615 (Mo. App. W.D. 2000); Hermel, supra; Xerox Corp. v. STC, 529 S.W.2d 413 (Mo. banc 1975).

Missouri courts have approved the comparable sales or market approach, the cost approach and the income approach as recognized methods of arriving at fair market value. St. Joe Minerals Corp. v. STC, 854 S.W.2d 526, 529 (App. E.D. 1993); Aspenhof Corp. v. STC, 789 S.W.2d 867, 869 (App. E.D. 1990); Quincy Soybean Company, Inc., v. Lowe, 773 S.W.2d 503, 504 (App. E.D. 1989), citing Del-Mar Redevelopment Corp v. Associated Garages, Inc., 726 S.W.2d 866, 869 (App. E.D. 1987); and State ex rel. State Highway Comm’n v. Southern Dev. Co., 509 S.W.2d 18,27 (Mo. Div. 2 1974).

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. 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).

Valuation Process

The appraisal of a property involves a series of steps or processes. The first step of an appraisal is identifying the problem. The appraiser must determine who is the client, who will be the intended user of the appraisal, the use and purpose of the appraisal, the effective date of the valuation, the characteristics of the property, and whether or not there are any extraordinary assumptions or hypothetical conditions that must be considered.

The appraisal report will be broken into several areas:

  1. Scope of Work Determination;
  2. Data Collection;
  3. Market analysis;
  4. Highest and best use;
  5. Site value opinion;
  6. Consideration of application of the approaches of value; and
  7. Reconciliation of value

 

Highest and Best Use

The highest and best use analysis determines the properties optimal use, when the property may achieve optimal use and who would be most likely the buyer or user of the property. It should be the probable and legal use of vacant land or improved property that is legally permissible, physically possible, appropriately supported, financially feasible, and that results in the highest value. The appraiser must review the economic base, site and location. The appraiser will review a property with improvements to determine its highest and best use as vacant and as improved. The highest and best use as vacant analysis helps the appraiser identify comparable properties and derive an opinion of land value. The highest and best use analysis as improved helps identify comparable improved properties and aids the appraiser in his determination of whether the improvement should be maintained, whether the deferred maintenance, if any, should be cured, or whether the improvements should be modified or demolished. An example from the Appraisal of Real Estate, 13th Edition page 280 looks at property with house on it that is in an area zoned commercial. If there is a demand for commercial property, the maximum productivity if vacant would be commercial. The home may contribute little to the value overall except for an interim use while the property transitions to commercial. However, if the market value for the home is greater than the market value for the permitted commercial use less the costs to demolish the home, the highest and best use would be as improved for continued residential use.

Highest and best use analysis is difficult on special use properties. As improved, the highest and best use is probably continuation of the special use if that use is viable. If there are no buyers for the special use property in its current use, an alternative use must be considered.

Complainant’s appraiser concluded that the property’s highest and best use if vacant, was as residential use and Respondent’s appraiser concluded it could be a “variety of rural development options.” As to the highest and best use as improved, the Complainant’s appraiser concluded that it would be commercial taking advantage of the improvements. Respondent’s appraiser concluded it would be as a regional brewery with associated brewpub.

Cost Approach

Both appraisers reviewed the sales and income approach and concluded that neither approaches were applicable in this situation. Both appraisers developed the cost approach. In the cost approach, value is estimated as the current cost of reproducing or replacing the improvements minus the loss in value from the depreciation plus land or site value. The cost approach is best in situations where the improvements are new or nearly new and where there is a lack of comparables in the market. The cost approach may be used with specialized property, however, using the cost approach to value a special use property where no market exists may overstate the market value of the property. Real Appraisal of Real Estate, 12th Edition, p. 294

The general process for developing the approach is (1) determine the cost new using reproduction or replacement cost (using either comparative unit, unit in place or quantity survey for estimating costs); (2) deduct depreciation (physical, functional and external) using either the market extraction, economic age-life, or breakdown methods; (3) conclude value of improvements; (4) add in contributory value of other site improvements; and (5) add land value.

The appraisers used different methodologies for developing their reproduction costs new but their determinations of cost were within a close range of each other. The appraisers’ land values were fairly close as well. The major difference in the appraisers’ valuations stems from their opinions on depreciation – primarily whether there was any functional and/or external obsolescence.

Depreciation

Depreciation may be deducted in a lump sum, accounting for all three types, or breaking out the three types of depreciation. Even if using a lump sum deduction, the appraiser must consider or account for all types of depreciation without considering the depreciation more than once.

Physical depreciation is the wear and tear from regular use, elements or damage.

Functional obsolescence is either a deficiency or super adequacy of the improvements. This type of depreciation results from a flaw in the structure, materials, or design that diminishes the function, utility and value of the improvement. The appraiser may compare the subject improvements with what would be the ideal improvements for the highest and best use and then make a deduction from the cost of the improvements.

External depreciation is a temporary or permanent impairment of the utility or sale of improvement due to negative influence outside the property. An example of external depreciation is adverse market conditions.

To calculate depreciation, an appraiser will look to the three methods – market extraction, economic age-life, and breakdown. Economic age life and market extraction methods are limited in that they produce a straight-line depreciation and they produce a lump sum depreciation amount.

Market extraction

The market extraction method of determining depreciation relies on the availability of comparable sales from which depreciation may be extracted. The appraiser should use direct comparisons with market sales. It should only be used if sufficient data exists and the quality of that data is adequate to permit meaningful analysis. This method can be used to extract total depreciation, total life expectancy and identify other types of obsolescence or excess physical deterioration.

There are several steps involved in this methodology and it necessarily relies on subjective decisions by the appraiser. The steps are:

  1. Find and verify similar properties sold in the market;
  2. Make adjustments to the sale prices for items other than depreciation;
  3. Subtract the value of land from the sale price to get the contributory value;
  4. Estimate the cost of improvements for each comparable at time of sale;
  5. Subtract the contributory value of all improvements from the current cost to construct to determine the amount of depreciation;
  6. Convert the dollar estimate of depreciation into percentages; and
  7. If the ages of the property vary, develop an annual depreciation rate.

 

 

If sales are plenty, the market extraction method provides a reliable and convincing estimate. To utilize this methodology an appraiser must be able to develop an accurate site value estimate and defensible cost estimates. The comparable properties must have physical, functional and external characteristics similar to subject and have incurred similar amounts and types of depreciation.

Break Down Method

The break down method separates the depreciation into physical, functional and external categories. The process is cumulative in that the subsequent step builds on the result of the prior step.

An appraiser may start with market extraction method and then go to break down method to categorize the depreciation. An appraiser must be careful in not considering depreciation more than once for each type of depreciation.

Respondent’s appraiser determined that there was physical depreciation, but found no functional or external obsolescence. The appraiser determined that the brewery’s estimated economic life would be 35-45 years and used 40 years. He estimated that the effective age of the property, due to its maintenance and renovations was 10 years. The appraiser found no functional obsolescence from inutility or super adequacy. He concluded that the property functions well for its intended use and believed that the improvements were appropriate for its use as a restaurant, bar, brewery and distillery. Lastly, the appraiser found that there was no external obsolescence from either its rural location or economics or market influences in the area. The appraiser determined that its rural location and scenic area was appropriate for the tourist and believed that there was market evidence that crafting brewing is a viable business.

Complainant’s appraiser found all three types of depreciation – physical, functional and economic. As to physical depreciation, the appraiser used the age-life method. The appraiser found the improvements to have a economic life of 50-60 years and an effective age of the school building of 20 years and the remaining improvements 5 years. The appraiser found functional obsolescence of the building due to the fact the brewery was attempting to operate out of an old school building. Most of the operation was utilizing the former gymnasium, but there was little use of the class rooms. The appraiser also believed that the stone fencing, gating, fire pit, and paved parking to be super adequacies as they are not seen in the market. For example, most parking is gravel rather than pavement.

The appraiser looked to the market, using the market extraction method, to estimate the functional and external obsolescence. The appraiser found nine sales to use as comparables. The appraiser then took the sales price of the comparables and deducted the site value to arrive at a value of improvements. The appraiser then used Marshall and Swifts to estimate reproduction cost new; he then estimated the life of the improvements and effective age to make a deduction for physical depreciation. The result is a lump sum determination providing an indication of the functional and external obsolescence. The appraiser made a determination of any functional obsolescence of the comparables after an inspection of the properties. The appraiser found no functional obsolescence in sale comparables 1-4, 6, and 7. Therefore the resulting amount is attributable to external obsolescence which can be applied as to the subject property. The functional obsolescence in the remaining properties based upon his experience and judgment was deducted and the result was in an indication of external obsolescence.

The appraiser estimated functional obsolescence to be 65% on the school building and 30% on the remaining improvements The appraiser found external obsolescence of 40%.

Complainants’ Burden of Proof

 

In order to prevail, Complainants 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, 2011. Hermel, supra. 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.” 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)

A valuation which does not reflect the fair market value (true value in money) of the property under appeal is an unlawful, unfair and improper assessment.

Valuation of Subject Property

          Both appraisers valued the subject using the cost approach, more specifically the reproduction cost new. Complainant used the cost manual section by property type – breaking the property into school building, warehouse, etc and Respondent determined by cost by valuing it as one improvement. Complainant’s appraiser calculated the cost new at $2,477,508. Respondent’s appraiser calculated cost new at $2,386,123. Both appraisers found some type of physical depreciation using an age-life methodology. Respondent determined that the improvements had an effective age of 10 years with an economic life of 40 years or 25% physical depreciation. Complainant reviewed each improvement and found depreciation in a range of 10 to 60%; an overall physical depreciation applied was 18.9%. After application of the physical depreciation, the resulting indication of value was $2,007,727 in Complainant’s calculations and $1,789,593 in Respondent’s calculations.

The appraisers next reviewed the subject for functional and external depreciation. Respondent’s appraiser found no functional or external depreciation. Complainant found 30-65% functional depreciation on the various improvements and 40 % external depreciation.

The appraisers’ opinion as to functional and external depreciation is the difference in the opinions of value.  The subject property is a former school building. The improvements served as a flea market at one time. The improvements now serve the brewery operation and are part of a total business plan of the owner who owns a winery in the area.

The evidence was substantial and persuasive that the improvements suffer from functional and external depreciation. Respondent’s appraiser found no functional or external depreciation. Complainant’s appraiser found all three types of depreciation and used recognized methodologies to make an appropriate adjustment. Respondent attorney is correct in that the methodology used by the Complainant’s appraiser requires subjective analysis from the expert. The appraiser was limited by the lack of perfectly comparable sales because there were no sales of buildings originally constructed as schools turned into flea market turned into breweries. He did include in his comparables a sale of a school building subsequently used as a restaurant, then purchased by a church and is now being used as a residence by the person who took over the note for the church. The appraiser reviewed the subject property and found that its highest and best use would be commercial use taking advantage of the improvements. Relying on his highest and best use analysis, he reviewed the market for most appropriate sales for comparison

The subject property is a unique property making it impossible for an appraiser to apply a formulaic approach. An appraiser must follow the approaches to value, but also rely on their experience and training to develop those approaches. The Complainant’s appraiser used recognized approaches to form an opinion of value. The facts or data upon which he based his opinion were of a type reasonably relied upon by experts in the field in forming opinions. The appraiser’s opinion was not a mere guess or conjecture, but formed from his experience and adequate data.  Phares v. Century Electric Co.  82 S.W.2d 91 (Mo. Div. 1, 1935) Complainant’s appraiser’s opinion of value, formed using the cost approach and recognizing all three types of depreciation, was substantial and persuasive evidence to establish true value.

ORDER

The assessed valuation for the subject property as determined by the Assessor and sustained by the Board of Equalization for Ste. Genevieve County for the subject tax day is SET ASIDE.

The assessed value for the subject property for tax years 2011 and 2012 is set at $238,720.

Application for Review

A party may file with the Commission an application for review of this decision within thirty days of the mailing date set forth in the Certificate of Service for this Decision. The application shall contain specific facts or law as grounds upon which it is claimed the decision is erroneous. Said application must be in writing addressed to the State Tax Commission of Missouri, P.O. Box 146, Jefferson City, MO 65102-0146, and a copy of said application must be sent to each person at the address listed below in the certificate of service.

Failure to state specific facts or law upon which the application for review is based will result in summary denial. Section 138.432 RSMo.

Disputed Taxes

The Collector of Ste Genevieve County, as well as the collectors of all affected political subdivisions therein, shall continue to hold the disputed taxes pending the possible filing of an Application for Review, unless said taxes have been disbursed pursuant to a court order under the provisions of Section 139.031.8, RSMo.

Any Finding of Fact which is a Conclusion of Law or Decision shall be so deemed. Any Decision which is a Finding of Fact or Conclusion of Law shall be so deemed.

SO ORDERED this 2nd day of July, 2014.

STATE TAX COMMISSION OF MISSOURI

 

Maureen Monaghan

Hearing Officer

Certificate of Service

 

I hereby certify that a copy of the foregoing has been mailed postage prepaid on this 2nd day of July, 2014 to: James Gamble, 231 S. Bemiston Ave., #1111, St Louis, MO 63105, Attorney for Complainant; Richard Reed, 136 E. Michigan Ave., #800, Kalamazoo, MI 49007, Attorney for Respondent; Linda Wagner, Ste. Genevieve County Assessor, 55 S. Third St., Ste. Genevieve, MO 63670; Kay Basler, Ste. Genevieve County Clerk 55 South Third St., Ste. Genevieve, MO 63670; Phyllis Vessell Ste. Genevieve County Collector 55 S. Third Ste. Genevieve, MO 63670.

 

Jacklyn Wood

Legal Coordinator