MIDCOAST AVIATION, INC. )
)
Complainant, )
)
v. ) Appeal Number 03-10233
)
)
PHILIP MUEHLHEAUSLER, ASSESSOR, )
ST. LOUIS COUNTY, MISSOURI, )
)
Respondent. )
DECISION AND ORDER
HOLDING
The evidence in the record persuasively establishes that the value of the leased fee is higher than the market-indicated value for the fee simple interest in the property. Under the terms of the lease, the lessee is paying rent that is higher than the market rent. Accordingly there is no bonus value to the leasehold interest. As of January 1, 2003, Complainant’s leasehold interest in the subject property had a $0 value for property tax purposes.
ISSUE
The ultimate issue in this appeal is: Does the rental obligation under the lease provide a savings to the lessee when compared to market level rents for comparable properties?
SUMMARY
Complainant appeals the assessment of its leasehold interest in a 20 acre parcel improved with a two-story terminal/office building and four (4) aircraft hangars located at Lambert-St. Louis International Airport. The property is leased to Complainant by the City of St. Louis. Complainant maintains that there is no bonus value to the lease, therefore there is no value subject to taxation. Respondent valued the leasehold improvements at a market value of $3,569,200 for a corresponding commercial assessment of $1,142,140. The St. Louis County Board of Equalization reviewed and affirmed this assessment.
The evidentiary hearing in the above-styled appeal was held on Tuesday, July 27, 2004 before State Tax Commission Hearing Officer, Aimee L. Smashey, at the St. Louis County Collector’s Office Conference Room, in Clayton, Missouri. Complainant was represented by Mr. Charles Misko and Ms. Gretchen Garrison, Attorneys at Law. Respondent was represented by Ms. Paula Lemerman, Associate County Counselor.
EVIDENCE
Complainant’s Evidence
Complainant submitted the following exhibits in support of its positions:
| Exhibit A | Market Rent Analysis and Appraisal of Midcoast Aviation Leasehold Interest in Facilities at Lambert – St. Louis International Airport, St. Louis, Missouri |
| Exhibit B | 2003 St. Louis County Real Estate Tax Bill |
| Exhibit C | 2003 St. Louis County Change of Assessment Notice |
| Exhibit D | June 16, 2003 Transmittal Letter to Board of Equalization |
| Exhibit E | Agency Authorization Form |
| Exhibit F | Appeal to Board of Equalization |
| Exhibit G | Lease Agreement |
| Exhibit H | Market Rental Analysis dated December 28, 1998 |
| Exhibit I | Supplemental Income and Expense Form and Attachments |
| Exhibit J | Decision of Board of Equalization |
| Exhibit K | Notice from the Board of Equalization dated August 15, 2003 |
| Exhibit L | September 4, 2003 Transmittal Letter to the State Tax Commission |
| Exhibit M | Complaint for Review of Assessment and Attachments |
| Exhibit N | Curriculum Vitae of Neil Ewing |
| Exhibit O | Documents Produced in Response to Respondent’s First Request for Documents |
| Exhibit P | Written Direct Testimony of Neil Ewing, Appraiser |
| Exhibit Q | Written Direct Testimony of James Bates, Vice President and Chief Financial Officer of Complainant Corporation |
Respondent’s Evidence
Respondent did not submit evidence on the issues.
FINDINGS OF FACT
1. Jurisdiction over this appeal is proper. On August 15, 2003, the St. Louis County Board of Equalization issued a decision affirming the Assessor’s valuation of the subject improvements. On September 8, 2003, Complainant filed its Complaint for Review of Assessment with the State Tax Commission.
2. The subject property in this appeal is identified by locator number 12K230064 and is located at 9805 Air Cargo Road, Lambert-St. Louis International Airport, St. Louis, Missouri. It consists of a tract of land containing approximately 20 acres, improved with a 9,248 square foot two-story terminal/office building of steel and glass construction, approximately 102,325 square feet of hangar area in four buildings, a fuel facility, a concrete aircraft ramp, and a parking lot. Complainant’s Exhibit G, at 5 – 6, and Complainant’s Exhibit A, at 12.
3. The subject property is owned by the City of St. Louis and leased to Complainant, Midcoast Aviation, Inc. Complainant and the City of St. Louis have a lease history at the subject airport dating back to 1957. Complainant’s original lease with the City of St. Louis began in 1957 and involved a different site in the Lambert complex. After many amendments which allowed for more land area for additions to Complainant’s facilities, the lease was amended in 1985 which (1) enabled Complainant to move their facilities to their current location consisting of 20 acres; (2) enabled the City to expand the Lambert International Airport Terminal; and (3) provided that the city would grant Complainant $9,350,000 to construct improvements on the 20 acre site. The improvements were constructed and placed into operation as of March 30, 1987. The negotiated ground lease payment pursuant to this lease was $87,120 per year with a lease expiration of April 30, 2000. Complainant’s Exhibit H, at 1.
The current lease provides for an initial term of five (5) years which began April 30, 2000, and is scheduled to expire on April 29, 2005. The lease provides for two additional five year terms at the option of the Lessee. The City may terminate the lease at any time for a Higher and Better Use by giving the Lessee one year prior written notice. Id., at 9. The annual rental payment under the current lease is $685,000. Id., at 11.
4. Complainant offered the testimony and appraisal report of Neil Ewing. Mr. Ewing is an appraiser licensed with the Missouri Real Estate Appraiser’s Commission and has 36 years of experience in the appraisal field. Complainant’s Exhibit P, at 1.
5. Mr. Ewing was retained in 1998 for the purpose of preparing a Market Rental Analysis for the subject property for use in the negotiations for the new lease. Id, at 7. His analysis involved a review of national data from the National Air Transportation Association involving hangar rental rates to determine average rates per square foot at both large hub and medium hub airports. The analysis also reviewed leases on certain facilities that Mr. Ewing found to be comparable. His analysis indicated that the rental should be on the order of $4.17 per square foot or $471,980 per year. Id., at 7, Complainant’s Exhibit H, at 4 – 9, and 22.
6. Mr. Ewing was retained in 2004 for the purpose of appraising Complainant’s leasehold interest in the subject property as of January 1, 2003 by the estimation of the market rent for the subject property and a determination whether a bonus value was present.
7. Mr. Ewing’s appraisal and analysis for the tax date in question, involved an investigation of the local general aviation hangar market which indicated that in the last five years, fixed base general aviation operations have severely decreased at major metropolitan airports. He concluded that locations at smaller airports are more conducive to private fixed-base operations than locations at metropolitan/international airports. Complainant’s Exhibit A, at 34.
Mr. Ewing performed a cost approach, sales comparison approach, and income approach to determine the market value of the fee simple interest in the subject property as of January 1, 2003. The indicated values were:
| Cost Approach | $6,675,000 |
| Sales Comparison Approach | $6,335,000 |
| Income Approach | $6,520,000 |
The income approach is typically the most persuasive indicator for a properties that are leased on a net basis. The income approach application is supported by market lease data from comparable hangar facilities, and Korpacz and RERC/CRE capitalization rate surveys. Mr. Ewing relied primarily on the income approach and concluded a value of $6,520,000 as representative of the market value of the fee simple interest in the subject property as of January 1, 2003.
8. The leased fee produces an annual rental income of $685,000. Deductions of 2% for vacancy and collection loss, 2% for management fee, and 2% for reserves for replacement indicate a net rental income of $644,448. The net rental income capitalized a 9.5% indicates a value of $6,783,633 for the leased fee.
CONCLUSIONS OF LAW
1. The City of St. Louis as owner of the subject property is immune from taxation.
2. “…[L]easeholds in city owned real estate are taxable if they have value.” Frontier Airlines, Inc., et al. v. State Tax Commission, 528 S.W.2d 943, 947 (Mo. banc 1975) (citing Iron County v. State Tax Commission, 437 S.W.2d 665(3) (Mo. 1968)).
3. Complainant, as the movant in the appeal, has the burden of presenting substantial and persuasive evidence in support of its proposed value. Hermel, Inc. v. State Tax Commission, 564 S.W.2d 888, at 897.
4. “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).
5. “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).
6. “…[T]he value of the leasehold should be determined from the testimony of a qualified expert witness as that value which a buyer under no compulsion to purchase the tenancy would pay to a seller under no compulsion to sell, taking into consideration the period of the lease yet to run, including the unexercised right of renewal, the favorable and unfavorable factors of the leasehold estate, the location, type of construction of the building, the business of the tenant, comparable properties in similar neighborhoods, present market conditions and future market trends, and all other material factors that would enter into the determination of the reasonable market value of the property. The bonus value, sometimes referred to as the leasehold savings or profit, is the difference between the economic rental and the contract rental. The economic rental is the actual market value of the use and occupancy.”
Land Clearance for Redevelopment Corp. v. Doernhoefer, 389 S.W.2d 780, 784 (Mo. 1965); Frontier Airlines, Inc., et al. v. State Tax Commission, 528 S.W.2d 943, 947 (Mo. banc 1975) (accepts the bonus value methodology for the valuation of leasehold interests in city owned properties for tax assessment purposes).
“…[A] lease of tax exempt property does not have a value for ad valorem taxation purposes unless the lease has a bonus value. [Missouri Courts have held] that bonus value exists only when the contract rent actually being paid is less than the market rent for the [leased property]”. Sky Chef v. Morton, 1990 WL 99912, STC Appeal No. 88-10458, (March 8, 1990), at 7.
7. The value of the leased fee is higher than the market-indicated value for the fee simple interest in the property. Under the terms of the lease, the lessee is paying rent that is higher than the market rent. Accordingly, there is no bonus value to the leasehold interest.
8. As of January 1, 2003, Complainant’s leasehold interest in the subject property had a $0 value for property tax purposes.
DECISION
Our courts have made clear that the lease of property owned by an entity immune from taxation has no leasehold value for ad valorem taxation purposes unless the lease has a bonus value. A bonus value is said to exist when the contract rent pursuant to the lease is less than the market rent for the leased property. The evidence on the record establishes that the rent secured by the subject lease provides a higher return for the leased fee than what could be commanded for the subject property in the open market on or about the tax date. The value of lessor’s interest in the leased fee is greater than the market value of the fee simple interest in the subject property. Accordingly, there is no profit or bonus value to the lessee under the lease. Therefore, this Hearing Officer concludes that Complainant’s leasehold interest in the subject property had a $0 value for property tax purposes as of January 1, 2003.
ORDER
The assessed valuation for the subject property for the 2003 tax year, as determined by the Assessor and affirmed by the Board of Equalization is SET ASIDE.
The Clerk is hereby ordered to place a new assessed value of $0 on the books for tax years 2003 and 2004.
A party may file with the Commission an application for review of a hearing officer decision within thirty (30) days of the mailing of such decision. The application shall contain specific detailed grounds upon which it is claimed the decision is erroneous.
If an application for review of a hearing officer 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. 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 St. Louis 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 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 December 16, 2004.
STATE TAX COMMISSION OF MISSOURI
Aimee Smashey
Hearing Officer