State Tax Commission of Missouri
LOWE’S HOME CENTERS, INC.,)
v.) Appeal Number 06-52004
CHRISTOPHER ESTES, ASSESSOR,)
ORDER SETTING ASIDE HEARING OFFICER DECISION
AND AFFIRMING BOARD OF EQUALIZATION
Upon review of the entire record, the Commission sets aside the Hearing Officer Decision entered on November 9, 2007, and sustains the value determined by the Assessor and approved by the Board of Equalization.
On November 9, 2007, Senior Hearing Officer W. B. Tichenor entered his Decision and Order (Decision) setting aside the assessment by the Cole County Board of Equalization sustaining the assessment made by the Assessor and setting true value in money for the property under appeal for tax year 2006 at $8,900,000, assessed value as commercial property of $2,848,000.
Respondent timely filed his Application for Review of the Decision.Complainant timely filed (December 31, 2007) its Response.The Application for Review raised the following points:
POINTS RAISED IN APPLICATION FOR REVIEW
The following points, summarized for purposes of this Decision, were presented for the Commission’s consideration in Respondent’s Application for Review:
1. The Hearing Officer erred in failing to recognize Complainant’s appraiser performed his appraisal under the hypothetical assumption that Complainant was not the occupant of the property.(Assumption & Limiting Condition 21, p. 5, Exhibit A) Thus, Complainant’s appraisal did not meet the requirements of USPAP.App. Rev. ¶ 5 & 6.
2. The Hearing Officer erred in failing to recognize that the property is a four-year-old first-generation build-to-suit owner-occupied property in his decision.App. Rev. ¶ 7.
3. The Hearing Officer erred by failing to give any weight to Complainant’s $15,000,000 cost expenditure for the land and improvements but instead accepted adjustments made by Complainant’s appraiser from properties not similar to the subject, and gave no consideration to those properties that were similar.App. Rev. ¶ 8.
4. The Hearing Officer erred by failing to acknowledge the subject property’s desirable location, improvement and remaining economic life. App. Rev. ¶ 9.
5. The Hearing Officer erred by accepting Complainant’s appraiser’s choice of comparison properties.App. Rev. ¶ 10.
6. The Hearing Officer erred by giving consideration to the flawed sales comparison approach made by Complainant’s appraiser. App. Rev. ¶ 11.
7. The Hearing Officer erred in accepting that the Complainant’s appraiser had properly addressed factors of Entrepreneurial Profit, Depreciation, Functional and External Obsolescence under the Cost Approach as the Hearing Officer found the six year old building depreciated 90%.Complainant’s appraiser directly violated USPAP by committing a substantial error by applying depreciation based upon faulty calculations and hypothetical assumptions.App. Rev. ¶ 12.
8. The Hearing Officer erred when he categorized or compared the property to second-generation leases. App. Rev. ¶ 13.
9. The Hearing Officer erred in accepting as relevant the appraiser’s hypothetical that lack of speculative construction of properties diminishes the value of the subject which was built to suit, owner-occupied property.App. Rev. ¶ 14.
10. The Hearing Officer erred by ignoring the Respondent’s Sales Comparison, Income and Coast Approaches and by not considering the Lowe’s property as it actually exists.App. Rev. ¶ 15.
11. The Hearing Officer erred in his judgments, assumptions and opinions by accepting Complainant’s appraisal and ignoring its flaws of:
(a) the development and calculation of external obsolescence;
(b) the failure to observe narrative comments in the Complainant’s appraisal that state he assigned a 3% per year adjustment for age and condition, but adjustment calculations in the sales grid did not indicate this was used;
(c) the lack of appropriate adjustments to reflect differences in land to building ratios in the sales or income approaches;
(d) the use of improved sales in the appraisal that the appraiser acknowledged were not verified; and
(e) the use of a local land sale that the appraiser acknowledged he could not verify its usable area.App. Rev. ¶ 16.
12. The Hearing Officer erred in dismissing or incorrectly stating each and every approach and the reconciliation presented by Respondent’s appraisal.App. Rev. ¶ 17.
13. The Hearing Officer erred in finding Complainant’s evidence met the necessary standard of substantial and persuasive on the issue of fair market value.App. Rev. ¶ 18.
14. The Hearing Officer erred in accepting the overall rate developed by Complainant’s appraiser under the income approach.App. Rev. ¶ 19.
15. The Hearing Officer erred in not fulfilling his responsibility of “Duty to Investigate” in accordance with §138.430.2 RSMo.App. Rev. ¶ 20.
16. The Hearing Officer erred in the following respects:
(a)failing to value the improvements of a build-to-suit, owner-occupied structure and place a value equal to that of the land as improved;
(b)failing to address the appraisal concept of consistent use;
(c)being arbitrary and capricious and going against the weight of the evidence;
(d)basing the decision on a hypothetical appraisal and not that of the property
being appraised; and
(e)determining that Complainant’s evidence rebutted the presumption of
correctness of the assessment by the County Board of Equalization.App. Rev. ¶ 20.
17.The Decision if allowed to stand will create a Jurisdictional Exception when valuing owner-occupied, build-to-suit, special-purpose, and limited market properties.App. Rev. ¶ 21.
FINDINGS OF FACT
The subject property is located at 3441 Missouri Boulevard, Jefferson City, Missouri.The property is identified by parcel identification number 48-10-02-09-0001-004-001.The property consists of 26.73 acres, improved by a single-tenant (owner) retail warehouse structure containing 136,765 square feet of gross building size and net rentable area.The outside lawn and garden area consists of an additional 47,965 square feet of space.The site also includes the necessary support parking, lighting, sidewalks, docks and other amenities ordinarily associated with such retail warehouse properties.The improvements were constructed in 2000 for approximately $14.8 million.It has been utilized as a Lowe’s home improvement store and warehouse since 2000.
There was no evidence of new construction and improvement from January 1, 2005, to January 1, 2006.
CONCLUSIONS OF LAW
The Commission finds the following specific law to be controlling:
1.“The assessor. . .shall annually assess all real property. . .and possessory interests in real property at. . .its true value in money. . . “Section 137.115.1(1), RSMo 2000.
2.To obtain a reduction in assessed valuation based upon an overvaluation, also called an improper or over-assessment, or an arbitrary and capricious assessment, the Complainant must prove the true value in money of the subject property on the subject tax day.Hermel, Inc. v. State Tax Commission, 564 S.W.2d 888, 897 (Mo. banc 1978).
3.True value in money is defined as the price which the subject property would bring when offered for sale by one willing but not obligated to sell it, and is bought by one willing or desirous to purchase, but who is not compelled to do so.Greene County v. Hermel, Inc., 511 S.W.2d 762, 771 (Mo. 1974).True value in money is defined in terms of value in exchange, and not in terms of value in use.Stephen & Stephen Properties, Inc. v. State Tax Commission, 499 S.W.2d 798, 801-803 (Mo. 1973).In sum, true value in money is the fair market value of the subject property on the valuation date.Hermel, Inc. v. State Tax Commission, 564 S.W.2d 888, 897 (Mo. banc 1978).
4.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, 2005.Hermel, Inc. v. State Tax Commission, 564 S.W.2d 888, at 897.Substantial evidence can be defined as such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.See, Cupples-Hesse Corporation.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.Brooks v. General Motors Assembly Division, 527 S.W.2d 50, 53 (Mo. App. 1975).See also, 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).
5.“The facts upon which an expert’s opinion is based, like the facts sufficient to support a verdict, must measure up to the legal requirements of substantiality and probative force; the question of whether such opinion is based on and supported by sufficient facts or evidence to sustain the same is a question of law for the court.”Robinson v. Empiregas Inc. of Hartville, 906 S.W.2d 829 (Mo. App. S.D. 1995).An expert’s opinion must be founded upon substantial information, not mere conjecture or speculation, and there must be a rational basis for the opinion.Missouri Pipeline Co. v. Wilmes, 898 S.W. 2d 682, 687 (Mo. App. E.D. 1995).”
6.UnderMo.Const., Article X, Section 14, the state tax commission corrects “any assessment which is shown to be unlawful, unfair, arbitrary or capricious.”Thus, in order to prevail, the taxpayer must establish that the decision of the board of equalization falls into one of the above four categories.If a taxpayer fails to make the required showing, it will not prevail, regardless of the amount of evidence — or lack of evidence — presented by the county.
A review of the record in the present appeal does not provide support for the determinations made by the Hearing Officer.Our review is to determine whether the decision is supported by competent and substantial evidence upon the record as a whole.Complainant must present substantial and persuasive evidence that that the value placed upon its property by the Board of Equalization was excessive, unlawful, unfair, arbitrary or capricious and that the proposed value is indicative of the market value of the subject property on January 1, 2005.
The Complainant did not present substantial and persuasive evident that the value placed upon the property was excessive, unlawful, unfair, arbitrary or capricious.The opinion of the Complainant’s expert was not based on or supported by sufficient facts or evidence.
The Complainant’s appraiser believed that if the improvement was vacant, the highest and best use would be to demolish the improvement and sell the site to another retailer.(Tr. 16 & 20).The expert developed the Cost, Sales Comparison and Income Approaches to value.His Reconciliation and Final Value Estimate gave greater weight to the Sales Comparison Approach, as supported by the Income Approach.(Ex. A, p.119).He gave moderate consideration to the Cost Approach.
Review of the Complainant’s Cost Approach
As the Complainant’s appraiser states in his report, the cost approach is based upon the proposition that the informed purchaser would pay no more than the cost of producing a substitute property with the same utility as the subject property.The Cost Approach is particularly applicable when the property being appraised involves relatively new improvements, which represent the highest and best use of the land or when relatively unique or specialized improvements are located on the site and for which there exists no comparable properties in the marketplace.(Ex. A, p. 40).
The cost approach may be based on either reproduction cost or replacement cost.The reproduction cost, or cost of construction, is a determination of the cost of constructing an exact duplicate of an improved property using the same materials and construction standards.The replacement cost is an estimate of the cost of constructing a building with the same utility as the building being appraised but with modern materials and according to current standards, design and layout.While reproduction cost is the best indicator of value for newer properties where the actual costs of construction are available, replacement cost may be more appropriate for older properties.Snider v. Casino Aztar/Aztar Missouri Gaming Corp., 156 S.W.3d 341, 347 (Mo. 2005).
The subject property cost $14.8 million dollars to build in 2000.The Complainant’s appraiser opined a value of $8,910,000.He determined the land was valued at$8,150,000.He determined that the replacement cost new of the improvement was $7,847, 438.He determined that the total depreciation of the six year old structure was $7,089,286, resulting in a valuation of the improvements at $760,000. (Ex. A, pp. 42-53).
To determine the market value for the site, the appraiser used four land sales.The land sales occurred from March 2000 to February 2004.The properties ranged in size from 2.92 acres to 26.73 acres.The properties included the subject property which is 26.73 acres and was purchased in March 2000 for $7,467,648.The site was improved with fill and a retaining wall.
ComparableLandSale#3 is a 2.92 acre site which sold for $565,000 in 2004.The appraiser testified that he did not know if there were improvements on the property at the time of the sale, he did not verify the acreage, he did not know if demolition was involved and how much of the land was usable. (Tr. 33-35).The appraiser made 46% gross adjustments to the sale price.He listed the property as being comparable to the subject property but conceded that the property may have been inferior due to the limited actual useable area.If Comparable Land Sale 3 is removed from the analysis, the estimated value for the subject property increases by $582,180.(Tr. 38).
ComparableLandSale4 occurred in January 2006.The property was sold for $3,418,270.The property is 11.69 acres and only 50% of the property is useable.(Ex. A, p. 48).
During cross examination regarding the sales and the verification of the sales, the appraiser for the Complainant stated that he wished he would have done a more thorough job on his land analysis. (Tr. 32 & 36).
After concluding that the site is valued at $8,150,000, the appraiser then turned to valuation of the improvement.The appraiser, using Marshall Valuation Service, determined that the replacement cost new of the improvement was $7,847,438. (Ex. A, p. 50).
The appraiser then calculated the depreciation.The appraiser determined that the short-lived incurable items at $452,692.The appraiser determined that the long lived incurable items totaled $1,086,594.The appraiser calculated the external obsolescence “based upon the net operating income (assuming new construction) as compared to the net operating income required to support new construction.” In his calculation, the appraiser used an 8.5% vacancy rate although he testified that there is little vacancy in the area and stated in his report that the area is experiencing 100% occupancy.(Tr. 42 and Ex. A, p. 37).He estimated expenses of 22.3% of effective gross income.He concluded that the six year old building with a thirty year life had $5,550,000 external obsolescence. (Ex. A, p. 53).
After the appraiser estimated external obsolescence of $5,550,000, he added it to the short-lived and long-lived incurable depreciation ($452,692 and $1,086,594)He then deducted the total depreciation ($7,089,286) from the replacement cost new of $7,847,438resulting in a value of $758,152 for a six year old improvement of a 136,765 square feet.The improvement’s value was then added that to the land value of $8,150,000 for a resulting value rounded to $8,910,000 for a building and site that cost $14.8 million to produce six years prior.
The appraiser’s land sales, vacancy rate, depreciation, and expenses are all questionable.The actual cost to build the subject improvement in 2000 and purchase the land was $14,800,000.(Tr. 45).The improvements were less than six years of age and appear to be in good condition.It is unbelievable that an improvement that has a replacement cost new value of $7,847,438 that is only six years old has a depreciated value of $760,000.
Review of Complainant’s Sale Comparison Approach
The appraiser located sales of fee simple and lease fee estates.He divided the sales into six different groups for purposes of analysis.These groupings were: (1) Build-to-Suit Sale/Leasebacks; (2) Build-to-Suit Sales; (3) Later Term Leased Fee Sales; (4) Second Generation Leased Fee Sales; (5) Partial Leased Fee Sales; and (6) Fee Simple Sales.The appraiser provided sales comparison approach on fee simple sales (6) and later term second generation lease fee sales (3 & 4).
The property under appeal is owner-occupied.It is not the subject of a long term lease.
The appraiser included the following Assumption and Limiting Condition:
“As of the effective appraisal date, the subject property was 100% owner-occupied by Lowe’s.This analysis will conclude the market value for the subject property in fee simple estate.This market value conclusion specifically assumes that Lowe’s is not currently in occupancy but is in the market of potential users of the property.”Exhibit A.
The appraiser did not use first generation built-to-suit, owner/occupant sales as comparables.The appraiser stated that he could not find sales of fee simple interests of relatively new big box structures in the local market. (Tr. 47).The appraiser did not use build to suit sales involving Lowes in his analysis even though he had three such sales.(Tr. 48; Ex. A, p. 55).
Fee Simple Sales Analysis
The appraiser compared eight fee simple sales or transactions involving properties that were vacant at the time of their sale.(Ex. A, p. 58).The fee simple sales or transactions were not persuasive to establish market value.The sales did not meet the criteria of sales used to determine market value in that they were dated sales, foreclosures, bankruptcy, subject to restricted uses, or properties that were not on the market at the time of the sale.Further, gross adjustments were made up to 81%.The poor quality of properties selected and analyzed is exampled by Improved Sale #1.ImprovedSale#1 is a 14.75 acre site with a 15 year old improvement of 137,649 square feet that sold on March 1, 2000, for $3,200,000. (Ex. A, p.60).At the hearing, the appraiser acknowledged that the transaction was part of a bankruptcy action. (Tr. 7-8).The appraiser also testified that the property was sold in April 2007 for $16,400,000 or $122.11 per square foot. (Tr. 7-8).
There are problems with the other sales as well.ImprovedSale#2 was a foreclosure.(Ex. A, Addendum B).ImprovedSale#3 was property that was vacant since the 1990s and subject to a bankruptcy proceeding. (Ex A, Addendum).ImprovedSale#5 was a sale of a 20 year old improvement of 104,000 square feet.The property was not on the market at the time of the sale.The purchaser, the city, approached the owner and the property was purchased for demolition. (Ex A, Addendum).ImprovedSale#6 was a sale of an 18 year old, 106,000 square foot improvement on 11.48 acres.The property was vacant for several years as the access to the highway had been closed. (Ex A, Addendum).The property was sold to a religious organization.ImprovedSale#7 was a sale of a 24 year old, 84,613 square foot building on 10 acres.The appraiser made 81% gross adjustments.(Ex A, p. 71).ImprovedSale#8 was a 14 year old building of 130,000 square feet.The property is vacant.
The total gross adjustments for the sales ranged from 22-81%, however, the appraiser made no adjustment for size. The properties ranged in size from 84,000 square feet to 137,649 square feet on 8.67 to 14.75 acres.The subject property is approximately 136,765 square feet on 26.73 acres.(Ex. A, p. 71).
The appraiser estimated a market range per gross building square feet of $23.60 to $52.19 with a mean of $40.52.(Ex. A, p. 71).Although the appraiser went through the analysis determining a market range of $23.60 to $52.19, the appraiser determined that the rate per gross building square feet to be used is a rate of $65.00. (Ex. A, p. 71).
Leased Fee Sales Analysis
The appraiser also did an analysis of Late Term and Second Generation Leased Fee Sales.A total of nine properties were compared to the subject property. Once again, the selection of properties and the analysis of the properties selected is not persuasive evidence of value.The problems with the analysis include properties selected were old improvements, the appraiser did not know the terms of the sale, the appraiser included “sales” which should not have been included, some of the sales selected were foreclosures, and the appraiser estimated the sales price rather than using actual sales price.The appraiser also made gross adjustments up to 60%.
For example,Sale#2 was part of the transaction of several stores betweenValueCityand Grandpa’s retail trade.(Ex. A, Addendum).Sale# 3 was a 126,852 square foot improvement built in 2004 on an 11.46 acre site.The sale was actually a sale leaseback.(Ex .A, Addendum).Sale#4 was a 97,227 square foot improvement built in 1973 with improvements in 1991 on a 9.76 acre site.The appraiser estimated a sales price of $4,000,000 for a sale occurring in 2005.The sale was confidential and the price not disclosed.(Ex. A, Addendum).Sale#5 was a fee simple sale rather than lease fee sale occurring, the appraiser testified that he should not have included the sale in this analysis. (Tr. 67).Sale#6 was a foreclosure.(Tr. 67).
Review of the Complainant’s Income Approach
The appraiser gave significant consideration to the Income Approach as support for his sales comparison approach.
The appraiser selected eight properties which were second-generation leases for big boxes taken on an as is basis to analyze in his Comparable Rentals Adjustment Grid.The adjusted market range per net rentable square foot (NRSF) was from $3.53 to $9.36, with the mean being $7.10.The appraiser used a $7.50 per NRSF for his income analysis. (Ex. A p. 98.).
The properties used to determine a market rent were not disclosed. The ages of the buildings were disclosed.Out of the list of thirty two improvements, none were built in 2000s.Some of the improvements were built in the 60s.The newest improvement was built in 1990.The properties ranged in size from 8,880 square feet to 196,906 square feet. (Ex. A. p. 101).
To calculate an overall rate, the appraiser looked at 20 buildings.Of the 20 buildings, only four were built in 2000s, one was built in 2003.The improvement completed in 2003 is 143,350 square foot building located inKansas City,Missouriwith an overall rate of 8.1%.The range of rates was 8 to 11.2%.The appraiser used a 9.35 percent cap rate.(Ex. A, p. 114).
The correct value for the subject property on January 1, 2006, is $13,577,700, assessed value of $4,344,860, as commercial property as originally determined by the assessor and approved by the Board of Equalization as the Complainant failed to rebut the presumption of validity, good faith and correctness of assessment by the CountyBoardof 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 Complainant failed to present substantial and persuasive evidence that the value they proposed was indicative of the market value of the subject property on January 1, 2005.Hermel, Inc. v. State Tax Commission, 564 S.W.2d 888, at 897.
The Decision of the Hearing Officer is SET ASIDE.The value approved by the Board of Equalization is AFFIRMED.The Clerk of Cole County is hereby ordered to put a market value of $13,577,700, assessed value of $4,344,860, commercial property, on the tax books for the subject property for tax year 2006.
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 date of the mailing of 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 (30) days, this decision and order is deemed final and the Collector of Cole County, as well as the collectors of all affected political subdivisions therein, shall disburse the protested taxes presently in an escrow account in accord with the decision on the underlying assessment in this appeal.
SO ORDERED September 30, 2008.
STATE TAX COMMISSION OFMISSOURI
Bruce E. Davis, Chairman
Jennifer Tidwell, Commissioner
Charles Nordwald, Commissioner
DECISION AND ORDER
Decision of the Cole County Board of Equalization sustaining the assessment made by the Assessor is SET ASIDE.Hearing Officer finds presumptions of correct assessment rebutted. True value in money for the subject property for tax year 2006 is set at $8,900,000, assessed value of $2,848,000.
Complainant appeared by Counsel, Wayne A. Tenenbaum, Leawood, Kansas.
Respondent appeared in person and by Counsel, James W. Gallaher IV, Assistant Prosecuting Attorney.
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, 2006, under the economic conditions as existing on January 1, 2005.
Complainant appeals, on the ground of overvaluation, the decision of the Cole County Board of Equalization, which sustained the valuation of the subject property.The Assessor determined an appraised value of $13,577,700, assessed value of $4,344,860, as commercial property.Complainant proposed a value of $8,900,000, assessed value of $2,848,000.A hearing was conducted on September 20, 2007, at the Cole County Courthouse Annex, Jefferson City, Missouri.Transcript was received by the Hearing Officer on October 25, 2007.
The Hearing Officer, having considered all of the competent evidence upon the whole record, enters the following Decision and Order.
Complainant offered into evidence, Exhibit A, a Self-Contained Appraisal Report by Gerald R. Maier, MAI, Missouri State Certified General Real Estate Appraiser, and Exhibit B, the written direct testimony of Mr. Maier.Both exhibits were received into evidence.
Respondent tendered as evidence, Exhibit 1, a Summary Appraisal Report by Judith A. Trail, Missouri State Certified General Real Estate Appraiser, and Exhibit 2, the written direct testimony of Mrs. Trail.Both exhibits were received into evidence.
FINDINGS OF FACT
1.Jurisdiction over this appeal is proper.Complainant timely appealed to the State Tax Commission from the decision of the Cole County Board of Equalization.
2.The subject property is located at 3441 Missouri Boulevard, Jefferson City, Missouri.The property is identified by parcel identification number 10-02-09-0001-004-001.The property consists of 26.73 acres, improved by a single-tenant (owner) retail warehouse structure containing 136,765 square feet of gross building size and net rentable area.The site also includes the necessary support parking, lighting, sidewalks, docks and other amenities ordinarily associated with such retail warehouse properties.The improvements were constructed in 2000.It has been utilized as a Lowe’s home improvement store and warehouse since 2000.Exhibits A & 1.
3.The development of the subject property by Lowe’s was not as a real estate investment, but as a facility where Lowe’s would be able to sell its products and make a return on and of its investment from a retail commercial enterprise.Tr. 32:20 – Tr. 33:6; Tr. 42:15-20; Tr. 46:14-24.
4.There was no evidence of new construction and improvement from January 1, 2005, to January 1, 2006.
5.The valuation by Complainant’s appraiser as January 1, 2006, does not fatally flaw the analysis and conclusion of value reached and is sufficient for a finding of value as of January 1, 2006, under the economic conditions as existing on January 1, 2005.See, Valuation Date, infra.
6.Complainant’s evidence was substantial and persuasive to rebut the presumptions of correct assessment by the Assessor and the Board and establish the true value in money as of January 1, 2006, to be $8,900,000.
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.Article X, section 14, Mo. Const. of 1945; Sections 138.430, 138.431, RSMo.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.Section 138.431.4, RSMo.
Presumptions In Appeals
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 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, even if simply to sustain the value made by the Assessor, is accepted as true only until and so long as there is no substantial evidence to the contrary.
Notwithstanding the provision of Section 138.431.3, RSMo – “There shall be no presumption that the assessor’s valuation is correct,” – the Supreme Court of Missouri has held, “A tax assessor’s valuation is presumed correct.”Snider v. Casino Aztar/Aztar Missouri Gaming Corp., 156 S.W.3d 341 (Mo. 2005).Citing to Hermel, supra; and Cupples Hesse Corp. v. State Tax Commission, 329 S.W.2d 696, 702 (Mo. 1959).
The presumption of correct assessment is rebutted when the taxpayer presents substantial and persuasive evidence to establish that the assessor’s and/or Board’s valuation is erroneous and what the fair market value should have been placed on the property.Snider, Hermel & Cupples Hesse, supra.Complainant’s evidence, as is discussed below, met the standard of substantial and persuasive to rebut the presumption of correct assessment by the Assessor/Board and prove 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.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).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 is 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 each 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.
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.
Mr. Maier properly developed his valuation of Complainant’s property applying the Standard of Value recognized by the courts and utilized by the Commission in its decisions.Exhibit A: 8; Exhibit B.The Maier appraisal concluded on an indicated value under the hypothetical sale and purchase by a willing seller and willing buyer of the fee simple interest in the Lowe’s property.The property is owned in fee simple and not under a leased fee situation.
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).
Complainant’s appraiser developed the three accepted approaches to arrive at an indicated fair market value.The appraisal was prepared in conformity with the Uniform Standards of Professional Appraisal Practice.Each approach to value was developed in accordance with the generally accepted guidelines and standards which the Hearing Officer expects to see followed in an appeal before the Commission.Exhibit A: 36 – 117; Exhibit B.Mr. Maier properly performed a reconciliation and final value estimate in support of his conclusion of value.Exhibit A: 118-119, Exhibit B: 10 – 11.
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).
The data relied upon by Complainant’s appraiser were of the types reasonably relied upon by real estate appraisers in performing the recognized approaches to value.Mr. Maier’s supporting data were of the kinds which appraisal experts utilize in forming opinions, inferences and conclusions when appraising a property such as the subject.The data set forth and referenced in the Maier appraisal were reliable for utilization in the present appraisal problem.
Assessment of real property in Missouri is under a two year assessment cycle.The assessor is to value property as of January 1, of the odd-numbered year.The assessed value established for the odd-numbered year, remains the value for the following even-numbered year in the absence of new construction and improvement to the property.Section 137.115.1, RSMo; 12 CSR 30-3.001(1).
When an appeal comes before the Commission in an even-numbered year, the Commission’s decision cannot go back and change the value for the preceding odd-numbered year.Therefore, in such an instance, the value concluded in a Commission decision can only be applicable to the even-numbered year.It has generally been the practice of the Hearing Officer to refer to the valuation date in even-numbered year appeals as January 1st of the even-numbered year, as he did in this appeal.Tr. 2:19-20.
From a technical statutory stand point, January 1st of the odd-numbered year is the effective date for valuation, in both odd- and even-numbered appeals.However, in the absence of affirmative evidence to establish that economic conditions dictate a valuation difference between the odd- and even-numbered year, an effective date of an appraisal of January 1st of the even-numbered year, is not fatally flawed to establish fair market value for the preceding odd-numbered year.
There is no evidence in the record from which the Hearing Officer could conclude that the value for January 1, 2005, and January 1, 2006, would have been significantly different from the value conclusion made by Complainant’s appraiser.The only direct evidence on the issue of the valuation date came in cross-examination of Mr. Maier.
“Q. …And as I guess you’re probably aware, in Missouri we have a two-year cycle, so essentially, we’re looking at what the value would have been in January 1, 2005.Would you – – Would you agree with that statement?
A.I would agree with the statement that Missouri is on a two-year cycle.
Q.Would you analysis be any different if you would have had to value the subject property as of January 1, 2005?
A.I – – I don’t – – Today, I don’t have an opinion of market value as of January 1, 2005.It would surprise me if I came up with a significantly different value indication.Just a year, it – – it would surprise me if it change much.”
Tr. 14:18 – Tr. 15:2.
Based upon the appraiser’s testimony and the review of the appraisal, the Hearing Officer is persuaded that the valuation would not be significantly different, valuing the property as of January 1, 2005.
Exhibit A – Sales Comparison Analysis
The improved sales (fee simple sales) referenced on page 71 of Exhibit A sold in a range from March 2000 to September 2005.Mr. Maier made upward adjustments to each sale for time and market conditions.The adjustments were based on a 3% per year factor to account for the passage of time between each sale and the effective appraisal date.Exhibit A., p. 68.
A valuation for 1/1/05 instead of 1/1/06 would have simply resulted in smaller adjustments for this factor, which would have produced a lower indicated value for each sale.None of the other adjustments would have been impacted by a different effective date of one year.Therefore, the indicated value for a 1/1/05 effective date might have been slightly less under the Improved Sales Analysis performed at pages 68 – 71.
The valuation of a second set of improved sales (leased fee sales) performed at pages 82 to 84 sold in a range of dates from February, 2003 to February, 2007.The time market adjustments made for these sales for a 1/1/05 instead of a 1/1/06 effective date would have resulted in slightly lower adjustments for sales occurring prior to 2005 and slightly higher adjustments for sales occurring after 2005.The net effect, if any, on the final concluded indicated price per square foot would seem to be minimal, with the slight differences in the time/market adjustments simply off setting each other.
Exhibit A – Income Approach Analysis
A review of the income approach shows that as with Complainant’s sales comparison analysis, the time/market condition adjustment made on the Comparable Rentals Adjustment Grid (Exhibit A, p. 98) would only be lowered if an effective date of 1/1/05 were to be used instead of 1/1/06.All of the expense base years and lease dates for the rental comparables were prior to 1/1/05.Therefore, the adjusted price per net rentable square footage for each comparable would be slightly less than that arrived at in the Maier appraiser if the effective date were 1/1/05.The net effect, if any, would appear to be a slightly lower indicated value under the income approach.
By using an effective date of January 1, 2006, instead of January 1, 2005, Complainant’s appraiser did not undervalue the subject property.If any thing, the property might be slightly overvalued when looking at a 2005 valuation date.In the absence of affirmative evidence to establish that the value conclusion for 2006 would be significantly different than a value conclusion for the preceding 2005, the effective date utilized by Mr. Maier of January 1, 2006 has no material impact in this appeal.
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, 2005.Hermel, Inc. v. State Tax Commission, 564 S.W.2d 888, at 897.Substantial evidence can be defined as such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.See, Cupples-Hesse Corporation v. State Tax Commission, 329 S.W.2d 696, 702 (Mo. 1959).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.Brooks v. General Motors Assembly Division, 527 S.W.2d 50, 53 (Mo. App. 1975).See also, 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).
Complainant’s evidence met the necessary standard of substantial and persuasive on the issue of fair market value of the subject property.
Approaches to Value
Mr. Maier developed the Cost, Sales Comparison and Income Approaches to value.Exhibit A: 40 et seq.; Exhibit B.He gave moderate consideration to the Cost Approach.His Reconciliation and Final Value Estimate gave greater weight to the Sales Comparison Approach, as supported by the Income Approach.Exhibit A: 118-119; Exhibit B.Each of the approaches was appropriately developed and adequately supported so as to establish a sound estimate of valuation.
Fee Simple versus Leased Fee
Complainant’s appraiser provided a detailed analysis of the appraisal problem presented in the present appeal.Mr. Maier recognized the need to distinguish between a valuation of the fee simple interest in the property and a leased fee interest.This is of great significance since a conclusion of value based upon a leased fee analysis misrepresents what the actual status of the Lowe’s property was on the valuation date.
The property under appeal is owner-occupied.It is not the subject of a long term lease.It was developed by the owner not as an investment in real estate.Rather, the property was developed by Lowe’s in order to create a stream of income from the sale of merchandise.The stream of income produced by the subject facility is not based upon the rental income from a leased fee property.
Mr. Maier’s analysis provides an excellent comparison of the crucial difference between a fee simple value and a leased fee value.It is without contradiction that in a hypothetical sale on the valuation date that the prospective purchaser of the subject property would only be buying the real property, because there was not in place a long term lease to Lowe’s.If the property had been under a long term lease to Lowe’s on the valuation date, then the hypothetical buyer would be purchasing, not the fee simple (real estate), but the leased fee.The prospective purchaser under the leased fee scenario would actually be purchasing the real property and the stream of income from the rental of the real estate to Lowe’s for the operation of its retail enterprise.As Mr. Maier developed and presented in an excellent manner, the leased fee value would be far greater than the fee simple value which could be realized.
Assumption and Limiting Condition
In addition to the general assumptions and limiting conditions which one generally expects to see in a self-contained appraisal report, Mr. Maier performed the appraisal under the following Assumption and Limiting Condition – 21:
“As of the effective appraisal date, the subject property was 100% owner-occupied by Lowe’s.This analysis will conclude the market value for the subject property in fee simple estate.This market value conclusion specifically assumes that Lowe’s is not currently in occupancy but is in the market of potential users of the property.”Exhibit A:5.
This is an assumption that under the hypothetical willing seller – willing buyer transaction the subject property would be occupied by a moderate credit tenant and that Lowe’s is in the market for the property.A value estimate assuming the property was vacant on the valuation date would be less than that concluded under Assumption 21.Exhibit A: 70 & 83.Such an assumption was appropriate for the present appraisal problem, as it is a means of recognizing the fact that on the valuation date Lowe’s was occupying the property.
The appraiser’s development of the Cost Approach provided a sound basis for valuation.Exhibit A: 41 – 53.The vacant land sales were appropriately documented and adjusted to arrive at a conclusion of land value to be used in the Cost Approach.
The estimate of replacement cost properly addressed the factors of Entrepreneurial Profit, Depreciation, Functional and External Obsolescence.The calculation of the External Obsolescence factor reflected the fact that speculative development of the subject facility is not feasible.The projected net operating income that could be expected for rental of the subject, absent a long term lease by Lowe’s, would not provide a sufficient income stream to justify the purchase of the land at the indicated value and the construction of the improvements.Exhibit A: 52; See also, Tr. 27:6 – 13; Tr. 44:3 – 16; Tr. 52:1 – 7; Tr. 53:9 – 19; Exhibit 2: Q & A 19.
Sales Comparison Approach
The Sales Comparison Approach developed by Mr. Maier also provided substantial and persuasive evidence to establish fair market value.Exhibit A: 54 – 86; Exhibit B.A total of sixty-four sale properties were considered for the development of the sales comparison analysis.The appraisal problem was researched by the appraiser focusing on properties with improvements in excess of 100,000 square feet, although properties will smaller improvement size were also considered.Mr. Maier divided the sales into six different groups for purposes of analysis.These groupings were: (1) Build-to-Suit Sale/Leasebacks; (2) Build-to-Suit Sales; (3) Later Term Leased Fee Sales; (4) Second Generation Leased Fee Sales; (5) Partial Leased Fee Sales; and (6) Fee Simple Sales.
Fee Simple Sales Comparison
There were a total of nineteen fee simple sales which the appraiser analyzed.He settled on eight sales for use in his fee simple sales comparison.Adjustments were made, as warranted for Time/Market Conditions, Age/Condition, Location, Improvement Size and Construction Quality.The adjusted prices per gross building square foot (GBSF) ranged from $23.60 to $52.19, with a mean of $40.52.Mr. Maier settled on a per GBSF value of $65.00.This resulted in an indicated value of $8,890,000.Exhibit A: 58 – 72.
Leased Fee Sales Comparison
Mr. Maier also did an analysis of Late Term and Second Generation Leased Fee Sales.This included consideration of a total of four sale properties.A total of nine properties were then adjusted, as warranted for Age/Condition, Location, and Construction Quality. The adjusted prices per gross building square foot ranged from $47.16 to $85.27, with a mean of $66.67.Mr. Maier settled on a per GBSF value of $65.00.This resulted in an indicated value of $8,890,000.Exhibit A: 73 – 85.
Mr. Maier’s development of the Income Approach provided support to his valuation under both of the other accepted approaches.Exhibit A: 87 – 117.Although the subject property is not a rental property, the utilization of the Income Approach was appropriate based on sufficient market data being available to provide sound support for this methodology.
The appraiser researched the market and found rent comparables from three different categories.The three groups of leases were (1) first-generation leased space designed for the user; (2) second-generation tenants in big box structures renovated for the subsequent user; and (3) second-generation leases for big boxes taken on an as is basis.The term “big box” refers to structures like the subject or similar 100,000 square foot plus buildings usually occupied by large national retailers, such as Lowe’s, Home Depot, Kohl’s, Wal-Mart, K-Mart, Target, etc.First-generation leases would not be indicative of or suitable for establishing market rental rate for the subject.Only the second-generation leases would be reflective of the market for the subject, as a leased fee property.Exhibit A: 87 – 89.
Mr. Maier was able to locate twenty-eight properties which were in his 2nd and 3rd groups of leases.From these he selected eight properties to analyze in his Comparable Rentals Adjustment Grid.For these properties, the appraiser, where required, made adjustments for Time/Market Conditions, Lease Terms, Building/Suite Size, Ade/Condition, Location and Construction Quality.The adjusted market range per net rentable square foot (NRSF) was from $3.53 to $9.36, with the mean being $7.10.Mr. Maier concluded on $7.50 per NRSF for his income analysis.Exhibit A: 90 – 99. An analysis was done to determine an appropriate Vacancy and Credit Loss, as well Operating Expenses.Exhibit A: 100 – 104.The Overall Rate was developed from research and analysis of Market Capitalization Rates (20 sales), Investor Survey, Late Term Net Lease Transactions (9 sales) and Analysis of Fee Simple Sales (8 sales). Exhibit A: 105 – 115.The value concluded under the Direct Capitalization Method (Exhibit A: 115 – 117) was appropriately supported and developed by the Appraiser.
Reconciliation and Final Estimate
The appraiser concluded on the values for the Cost, Sales Comparison and Income Approaches as $8,910,000, $8,890,000 and $9,060,000 respectively.The final estimate of value was $8,900,000.The final conclusion of value assumed current occupancy by a tenant with moderate credit and a medium term (5 to 7 years) lease.Had the property been valued as if vacant and Lowe’s not being in the market of potential users the concluded estimate of value would have had to been significantly less than arrived at by Mr. Maier.Exhibit A: 119.
Summary and Conclusion
The valuation of Complainant’s property was required to be on a fee simple basis as was done by Mr. Maier.Had the property been the subject of a long term lease by Lowe’s, the value would have been higher than concluded by the Maier appraisal.It is possible that Complainant might not have appealed under a leased fee situation, since the valuation by the Assessor might have been fairly close to a lease fee value.
The appraisal presented on behalf of Complainant approached the valuation problem in an appropriate manner.The appraiser did a very complete and detailed analysis under each of the approaches to value.The data underlying each of the approaches was reasonably reliable and the type of data recognized and utilized by appraisers.The testimony provided at hearing by Mr. Maier further solidified the analysis and conclusions developed in the appraisal.
The evidence produced in support of Complainant’s claim of overvaluation demonstrated that cost does not always equal fair market value.The lynch pin factor in this case is that Lowe’s does not purchase land and develop a property as a real estate investment.An investment by the Complainant in land, buildings and supporting improvements is for the sole purpose of being able to sell its home furnishings merchandise.Lowe’s and other such big box retailers do not expect to obtain a return on and of their investment from a real estate stream of income.The stream of income which supports and justifies the purchase of land and development of property for a major national retailer is the stream of income from its sale of goods.
It is clear that only in those instances where a big box retailer has entered into a long term lease could a developer hope to realize the return on and of an investment the size of what is made in developing a property such as that at 3441 Missouri Boulevard.Absent the existence of a long term lease with a major national retailer, no knowledgeable and prudent investor is going to pay the cost which Lowe’s paid for the subject tract of land and the improvements.As the property existed on the valuation date, an investor would not be able to obtain the rents necessary to justify paying $13.5 to $14 million dollars for the property under appeal.
To value the property under appeal as if there was a leased fee with Lowe’s as the tenant would simply be the wrong methodology.However, the assumption made by Mr. Maier of a lease with a tenant of lest credit standing than Lowe’s and for a term of only 5 or 7 years remaining, was an appropriate means of reaching the middle ground between a long term leased fee with Lowe’s and a vacant property.
Arguments that Lowe’s spent $12 or $13 million to acquire and develop the property and that it was occupied by Lowe’s on the valuation date and there is no indication that Lowe’s would sell the property in the foreseeable future simply are irrelevant to establishing market value.The analysis Mr. Maier put forth to arrive at his concluded value represents a reasoned and well-supported methodology for this type of appraisal problem.Complainant’s evidence rebutted the presumptions of correct assessment by the Assessor/Board and establish the fair market value for tax year 2006 to be $8,900,000
Respondent’s Burden of Proof
Respondent, when advocating a value different from that determined by the original valuation or a valuation made 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.Hermel, Cupples-Hesse, Brooks, supra.
In the present appeal, Respondent advocated a value of $14,700,000 based upon Exhibit 1 – Trail Appraisal.That evidence was not substantial and persuasive to rebut the presumption of correct assessment by the Assessor/Board and establish the value proposed.Nor was the evidence sufficient to rebut the conclusion of value determined by Complainant’s evidence and sustain the value of $13,577,700 as determined by the Assessor and sustained by the Board.
Approaches to Value
Respondent’s appraiser developed each of the recognized approaches to value.Exhibit 1: 25 – 52.However, a review of Exhibits 1 and 2 and the testimony of Mrs. Trail leads to the conclusion that weight was only given to the Cost Approach.The Sales Comparison and Income Approaches were developed and considered but in the final analysis no weight was given to either.Exhibit 1: 53 – 54; Exhibit 2:Q & A 24; Tr. 93:15.The Cost Approach resulted in an opinion of value of $14,700,000 and the final estimate of value was $14,700,000.Therefore, only the Cost Approach was actually relied upon by the appraiser.
Cost Approach Not Persuasive
Mrs. Trails reliance on the Cost approach was founded upon her conclusion that
“…the cost approach is particularly applicable when the property being appraised involved relatively new improvements which represent the highest and best use of the land, or when unique or special purpose improvements are constructed on the site and no comparable properties are present on the market.This approach is also appropriate for those properties where income data is scarce, in a market dominated by owner-occupants.”Exhibit 1: 53.
At first glance, it might seem appropriate to utilize only the Cost Approach for a property like the subject which was developed by Lowe’s in 2000.However, to do so operates under the mistaken assumption that Lowe’s treats the development of property for one of its big box stores as a real estate investment.Such is simply not the case.Lowe’s paid the price it paid for the land and paid the cost for the improvements, as discussed above, because it will obtain a return on and of this capital expenditure from the sale of merchandise, not from leasing the Missouri Boulevard property to another entity.
The appraiser’s determination of land value was not persuasive.Mrs. Trail relied upon four sales of properties to arrive at her indicated land value.All four were relevant as to the time of sale, one being the purchase of the subject tract by Complainant in 2000.However, two of the sales, although in close proximity to the subject, were of such smaller size as to not qualify as comparables for this appraisal problem.The two sales had land areas of only 31,363 and 30, 492 square feet, as compared to the subject’s land area of 1,164,359 square feet.Notwithstanding the close proximity of these two tracts to the subject, the significant difference in size – approximately 2.6% the size of the Lowe’s property – renders these two sales as not comparable to the subject.Therefore, the appraiser’s land value essentially comes down to a single sale and a trended value of the purchase by Lowe’s of the property for development.
The other problem with the methodology employed in arriving at land value is the fact that Mrs. Trail based her valuation on the “usable” area of the comparable tracts.Nothing in Exhibits 1 or 2, or the cross-examination, provided a basis as to why this procedure is appropriate to be used in an appraisal problem as presented in this case.A review of applicable literature on determining land value relying on comparable sales data failed to reveal any support for this arbitrary and unnecessary method of arriving at value.See, The Appraisal of Real Estate, Twelfth Edition, Appraisal Institute (2001), Chapter 13 – Land or Site Valuation & Chapter 14 – The Cost Approach.Absent some circumstance showing the need for using this method, it lacks probative value in the appeal.
It is recognized that the net indicated land values between the appraisers were within 8% of each other, Mrs. Trail’s total land value being $8,860,100 and Mr. Maier’s land value being $8,150,000.However, the Maier approach and supporting sales data were significantly stronger evidence of value than a trended sale value on the subject and a calculated “usable” land value on one other sale.
The critical problem with the appraiser’s cost approach is the failure to recognize any external obsolescence.Mrs. Trail reasoned:
“The subject property is located in a very desirable and high demand commercial area of Jefferson City.The subject improvements are compatible and supportive of other commercial uses along this section of Missouri Boulevard.There are no negative factors which affect the subject.Consequently no deduction from replacement cost new for external obsolescence is required.” Exhibit 1: 34.
Although the general statements provided in the appraisal can be considered true of the subject, the conclusion drawn from them, failed to recognize that the subject property would not support a stream of income as a real estate investment to support the concluded value of $14,700,000.The deduction for external obsolescence was required not because of the factors cited to on page 34 of Mrs. Trail’s appraisal.An adjustment was required because of the economic reality that absent a long term lease of the property by a tenant such as Lowe’s, no investor would pay the cost of the land and improvements as calculated by the Trail cost approach.Even using the appraiser’s own income approach, a deduction for external obsolescence in excess of $2,300,000 would be required.That is assuming that the income approach by Respondent’s appraiser did not overstate the indicate value of the subject.If the value were less than concluded by the appraiser’s income analysis, then the deduction for external obsolescence would have to be even greater, as demonstrated in the Maier appraisal.
Sales Comparison Approach Not Persuasive
Given that the appraiser placed no weight on this approach, the Hearing Officer gives it no probative value.For an appraiser to consider a given approach as Mrs. Trail did for this methodology, does not equate to giving weight to it in the reconciliation to arrive at an opinion of value.Such is the case in this instance.“The sales comparison approach was given consideration but …, the cost approach was relied upon for estimating the market value of the subject.Exhibit 1:54.
Absent the fact the appraiser gave no weight to this approach, the approach is otherwise unpersuasive.In arriving at a conclusion of value under the Sales Comparison Approach, the appraiser developed two separate grids of sales.One group of six sales involved sales of leased fee properties occupied by Lowe’s.Exhibit 1: 42 – 46.The other group of five sales was of discount warehouse properties which were not under lease. Exhibit 1: 47 – 51.
Leased Fee Sales
Had the subject property been under a long-term lease to Lowe’s, the use of the lease-fee sales to establish value would have been appropriate.However, given the fact that the subject is owner occupied, the use of these Lowe’s sales lacks probative value to arrive at fair market value for the subject.The conclusion of value is for a leased fee estate and not a fee simple estate.Absent a well support adjustment to these sales to account for the hypothetical sale of the subject being of the fee simple estate and not a leased fee, with Lowe’s as the lessee, the conclusion of value derived from these sales has no probative value in this appeal.
Fee Simple Sales
The second group of sales was of a series of five sales.Mrs. Trail utilized these sales to calculate an adjusted per square foot of the building value.To account for a location adjustment, the appraiser had subtracted land values from each sale.She then added back her calculated land value under the cost approach to arrive at her final conclusion of value under the Sales Comparison Approach.
Two of the sales (3B & 4B) relied upon by Respondent’s appraiser were of such significant smaller building size than the subject (32% & 42% of the subject) as to be disqualified as comparable properties.In addition Sale 4B was of a retail strip facility which is not a proper comparable for a retail big box property.
The three remaining sales sold for values of $31.16, $24.51 and $26.72 per square foot of gross building area (GBA) after an adjustment for market condition.After an adjustment to each of the properties for age, the indicated per square foot values would have been $46.74, $34.80 and $47.03, these values would include land values, but would not reflect any adjustment for location.
To account for the location adjustment, the appraiser subtracted the land value from the sale values after the market condition adjustment.The land value subtracted from each sale was not based on any type of analysis and study to arrive at the market value for such tracts in the counties where the properties are located.Ms. Trail relied upon the land value assigned by the assessor’s office in some instances and from the person from which she obtained the sales information in other instances.However, no documentation was provided in the appraisal report from which the Hearing Officer was able to determine the source for the land value deduction for any of the sales.
The adjustment for location was achieved by adding back to the calculated value for the subject building, based upon the sale comparables, the value Mrs. Trail had concluded for the subject land.No reference was cited to any authority for support of this type of methodology to arrive at a location adjustment.In this instance, it is unpersuasive.
Sale 1B was in effect adjusted downward for land value by $2,744,300, or $20.07 per square foot of the GBA, or a 43% downward adjustment ($20.07 ÷ $46.74 = .43).The adding back of the subject’s indicated land value ($8,860,100) equates to a per square foot of GBA adjustment of $64.78 ($8,860,100 ÷ 136,765 = $64.78) or an upward adjustment to the adjusted sale price of 243% (64.78 ÷ 26.67 = 2.429).
Sale 2B was adjusted downward for land value by $373,000, or $2.73 per square foot of GBA, or only a 7.9% downward adjustment ($2.73 ÷ $34.80 = .079). The adding back of the subject’s indicated land value ($8,860,100) equates to a per square foot of GBA adjustment of $64.78 ($8,860,100 ÷ 136,765 = $64.78) or an upward adjustment to the adjusted sale price of 203% (64.78 ÷ 32.07 = 2.023).
Sale 5B was adjusted downward for land value by $1,290,000, or $9.43 per square foot of GBA, or a 20% downward adjustment ($9.43 ÷ $47.03 = .201). The adding back of the subject’s indicated land value ($8,860,100) equates to a per square foot of GBA adjustment of $64.78 ($8,860,100 ÷ 136,765 = $64.78) or an upward adjustment to the adjusted sale price of 172% (64.78 ÷ 37.60 = 1.723).
Therefore, the indicated vales per square foot of GBA of these three sales calculate to $91.45, $96.85 and $102.38, compared to the unadjusted sales prices for these sales of $29.63, $23.84 and $25.69.Total net adjustments averaging in excess of 370% simply render the sale properties as non-comparable to the subject and the methodology employed as unpersuasive.Accordingly, notwithstanding the appraiser gave no weight to her sales comparison approach, the Hearing Officer would give no weight to it either.
Income Approach Not Persuasive
As with the Sales Comparison Approach, although it was presented, the appraiser gave no weight to this approach.Accordingly, the Hearing Officer gives it no probative value. Furthermore, there a significant problem with the approach.The capitalization rate used by Mrs. Trail, in light of the Maier data and analysis, was not appropriate for this appraisal problem.
When the Maier and Trail methodologies on the income approach are compared, the appraisers were less than $126,000 apart on Effective Gross Income.An examination of the expense deductions reveals that the appraisers were not that far apart on this item.Maier’s net expenses, accounting for reimbursed taxes and insurance added on the income side and subtracted on the expense site, come to $62,348 – 5.7% of EGI..Trail’s expenses are presented at 5% of her EGI or $49,082.Maier concludes a NOI of $860,508.Trail has a NOI of $932,549.
The critical difference in the two approaches is in the capitalization rates.Respondent’s appraiser selected an overall rate of 7.5% based upon market rates ranging from 6.55 to 7.63.However, these market rates were derived from sales of properties which were leased fee properties, leased by Lowe’s.The properties were sale-leaseback or first generation leases.Exhibit 1: 37 – 38.
As Mr. Maier observed in his appraisal – “The appraiser must be careful to recognize the difference between capitalization rates derived from these leased fee sales and the appropriate capitalization rate for application to a big box retail store.The capitalization rate applied to estimate the market value of the fee simple interest should reflect the market risks to that property not the credit risk of the tenant that happens to occupy it.”Exhibit A: 106.The problem with extracting the capitalization rate from the sales relied upon by Respondent’s appraiser is that this does not represent what a sale of the subject in January 2005 would be.It would not be a first generation lease.
The subject cannot sell under a first generation lease scenario, since there is no long term Lowe’s lease in place, as there was with the Lowe’s properties used to derive the capitalization rate.Mrs. Trail’s assumption that risk is lower for the subject because it is in a highly desirable retail area, and vacancy is non-existent did not consider the level of risk for the investor purchaser of the Lowe’s property, without having Lowe’s as a long-term tenant.The selection of a 7.5% capitalization rate was more reflective of the credit worth of Lowe’s than of the fee simply market value of the sale properties shown on page 38 of Exhibit 1.To support the capitalization rate of 7.5% it would be necessary to conclude that the most likely purchase of the subject property would be a sale-leaseback transaction.There is no evidence in Exhibit 1 which would establish such a conclusion.The only evidence in this record on this point clearly rebuts it.Lowe’s has never entered into a sale leaseback arrangement.Exhibit A: 38.
The analysis and supporting data on the selection of an overall rate presented by Mr. Maier established in convincing fashion that “purchasers of vacant big box structures perceive a significant risk from ownership of the property.”The conclusion of the capitalization rate by Complainant’s appraiser presented the far superior analysis and methodology to support the concluded rate of 9.5%.Exhibit A: 105 – 115.
If the 9.5% rate were used to capitalize the NOI derived by the Trail Income Approach, the indicated value would only be $9,816,300 ($932,549 ÷ .095 = $9,816,305).Accordingly, the Income Approach instead of supporting the concluded value of $14,700,000 rebuts that value.
Summary and Conclusion
The conclusion of value of by Respondent’s appraiser was only based upon the Cost Approach in the final analysis.The Cost Approach failed to account for economic obsolescence which should have been derived from a proper income analysis.The Sales Comparison Approach was developed on inadequate and inappropriate data.It was given no weight by the appraiser and could be given none by the Hearing Officer.The Income Approach was faced with the serious problem of utilization of a capitalization rate which relied upon first generation leases which could not be applied to the subject.When the appropriate capitalization of 9.5% was applied to the NOI calculated by Mrs. Trail, the indication of value supported the Maier conclusion of value and not the value proposed in Exhibit 1 or the value set by the Assessor and sustained by the Board.
The assessed valuation for the subject property as determined by the Assessor and sustained by the Board of Equalization for Cole County for the subject tax day is SET ASIDE.
The assessed value for the subject property for tax year 2006 is set at $2,848,000.
A party may file with the Commission an application for review of this decision within thirty (30) days of the mailing of such decision.The application shall contain specific grounds upon which it is claimed the decision is erroneous.Failure to state specific facts or law upon which the appeal is based will result in summary denial.Section 138.432, RSMo 2000.
If an application for review of this decision is made to the Commission, any protested taxes presently in an escrow account in accordance with this appeal shall be held pending the final decision of the Commission and an order to the Collector to release and disburse the impounded taxes.§139.031.3 RSMo.If no application for review is received by the Commission within thirty (30) days, this decision and order is deemed final and the Collector of Cole County, as well as the collectors of all affected political subdivisions therein, shall disburse the protested taxes presently in an escrow account in accord with the decision on the underlying assessment in this appeal.If any or all protested taxes have been disbursed pursuant to Section 139.031(8), RSMo, either party may apply to the circuit court having jurisdiction of the cause for disposition of the protested taxes held by the taxing authority.
Any Finding of Fact which is a Conclusion of Law or Decision shall be so deemed.Any Decision which is a Finding of Fact or Conclusion of Law shall be so deemed.
SO ORDERED November 9, 2007.
STATE TAX COMMISSION OF MISSOURI
W. B. Tichenor
Senior Hearing Officer