MISSISSIPPI LIME COMPANY, )
)
Complainant, )
)
v. ) Appeals No. 99-84500 & 99-84501
)
CLEMENT F. DONZE, ASSESSOR, )
STE. GENEVIEVE COUNTY, MISSOURI, )
)
Respondent. )
DECISION AND ORDER
HOLDING
Decision of the Ste. Genevieve County Board of Equalization sustaining the assessment made by the Assessor, SET ASIDE, Hearing Officer finds true value in money for the subject real property (Appeal No. 99-84500) for tax years 1999 and 2000 to be $58,285,000, assessed value of $18,651,200 and the true value in money for the subject personal property (Appeal No. 99-84501) for tax year 1999 to be $22,755,000, assessed value of $7,577,415.
Complainant appeared by Counsel, Byron Francis, St. Louis, Missouri.
Respondent appeared by Counsel, Margaret Mooney, St. Louis, Missouri.
Case heard and decided by Chief Hearing Officer, W. B. Tichenor.
ISSUES
The Commission takes this appeal to determine the true value in money for the subject real and personal property on January 1, 1999.
SUMMARY
Complainant appeals the decision of the Ste. Genevieve County Board of Equalization which sustained the valuation of the subject property. The Assessor determined an appraised value of $108,699,605 (assessed value of $34,783,870, as commercial property) and an appraised value of $9,744,294 (assessed value of $3,248,098, as personal property). Combined value for real and personal property of $118,443,899, assessed $38,031,968. Complainant proposed a true value in money of $75,000,000 for both the real and personal property. Respondent proposed a value for the real and personal property combined of $102,500,000 ($73,705,000 for the real property, $22,755,000 for the personal property and $6,040,000 for the mineral rights). A hearing was conducted on November 20 and 21, 2000, at the Ste. Genevieve County Courthouse, Ste. Genevieve, Missouri.
Protective Order
On January 13, 2000, the Hearing Officer entered his Order granting Complainant’s Motion for Protective Order. Portions of various exhibits filed by both Complainant and Respondent contain data, material and information that fell within the purview of the Protective Order. The entirety of exhibits filed by both Complainant and Respondent have been sealed by the Hearing Officer within the files of the Commission. In order to preserve data, material and information that falls or may fall within the purview of the Protective Order, this Decision and Order will not set forth specific data and information which might reveal income and expenses or production amounts related to the Complainant’s property and facility. The Hearing Officer has endeavored to exclude from this Decision and Order any information which was submitted under the Protective Order.
The parties filed Briefs on February 1, 2001. Both parties also filed Reply Briefs. The Hearing Officer, having considered all of the competent evidence upon the whole record and arguments advanced by parties through Briefs, enters the following Decision and Order.
Complainant’s Evidence
The following exhibits were received into evidence on behalf of Complainant.
Exhibit A Original Cost Improvements and Fixtures.
Exhibit B Income Data for Years 1995, 1996, 1997, 1998 and 1999.
Exhibit C Production Data for Years 1995, 1996, 1997, 1998 and 1999.
Exhibit D Ste. Genevieve Division, Cost of Sales Plant Closing, 1997.
Exhibit E Mississippi Lime Combined Balance Sheet Costs, 1998.
Exhibit F Ste. Genevieve Division Net Sales for December, 1999 and Budget for 2000.
Exhibit G Engineer’s Opinion of Cost for Greenfield Calcium Products Plant.
Exhibit H Appraisal Report by Real Estate Analysis Corporation – Michael J. Kelly.
Exhibit I Written Direct Testimony of Donald D. Roberts.
Exhibit J Written Direct Testimony of John D. Macfadyen, P.E.
Exhibit K Written Direct Testimony of Michael J. Kelly.
Exhibit L Deposition Spreadsheet – contains same information as Exhibit 32.
Exhibit M Spreadsheet.
Exhibit N Discounted Cash Flow Survey.
Exhibits M and N were also provided in electronic versions to the Commission on a disk.
Complainant’s Briefs
Complainant filed a Brief and Reply Brief in these appeals setting forth the Complainant’s theory of the case, with supporting arguments.
Summary of Complainant’s Case
Testimony of Donald D. Roberts
Complainant presented the testimony of Donald D. Roberts, Vice-President and Chief Financial Officer of Complainant. Mr. Roberts provided testimony to identify various exhibits which related to income, expenses, plant and production capacity, reserves and their value, net sales and general financial documents and records related to Complainant’s Ste. Genevieve plant. Exhibits A – F & I.
Testimony of John D. Macfadyen
Complainant also presented the testimony of John D. Macfadyen, Vice-President of Penta Engineering Corporation and a registered professional engineer. The testimony of Mr. Macfadyen related to the Opinion of Cost for a Greenfield plant. A Greenfield plant is a new plant to be constructed on bare land which would produce the same products in the same production capacities as the subject plant. In the report prepared by Mr. Macfadyen he calculated the capital cost to construct a new facility like the subject facility. Exhibits G & J.
Testimony of Michael J. Kelly
The information provided and developed by both Mr. Roberts and Macfadyen was utilized by Complainant’s appraiser in developing his opinion of value for the subject real and personal property. Michael J. Kelly, MAI, provided expert testimony on behalf of Complainant relative to the valuation of the subject property, both real and personal. Mr. Kelly developed the Cost, Sales Comparison and Income approaches to value to arrive at a final opinion of value.
Greatest weight was placed on the income approach due to there being more extensive data with regard to income, expense and capitalization information. Mr. Kelly utilized the historic income, expense and production data for the five year period, 1995 through 1999. The appraiser considered the indicated value under the income approach to be the prime indicator of value. That indicated value was $73,500,000. Both the market and cost approaches were considered, but neither was given as great a weight as the income approach. The value indicated under the sales comparison approach was $78,500,000. There were two sales of lime facilities which the appraiser was able to utilize. The cost approach produced an indicated value of $62,000,000.
The appraiser arrived at a final opinion of value for the subject facility of both real and personal property of $75,000,000. He then allocated 15% of that value to the land and buildings, with the remainder allocated for all the processing machinery and equipment. The final determination of value did not include a value for the mineral rights. Exhibits H, K, L, M & N.
Respondent’s Evidence
The following exhibits were received into evidence on behalf of Respondent.
Exhibit 1 Appraisal Report of Dinan Real Estate Advisers.
Exhibit 2 Appraisal Report by Chantal Appraisal.
Exhibit 3 Qualifications of Edward Dinan.
Exhibit 4 Missouri Licensed Real Estate Appraiser Certificate of Edward Dinan.
Exhibit 5 Qualifications of Ernest K. Lehmann.
Exhibit 6 Qualifications of Roger Chantal.
Exhibit 7 Articles of Incorporation.
Exhibit 8 Mississippi Lime Web Site Information.
Exhibit 9 U. S. Geological Service 1999 Directory of Lime Plants.
Exhibit 10 Assessor’s Record Cards.
Exhibit 11 1999 BOE Appeal.
Exhibit 12 Assessor’s Change Notice, 1999.
Exhibit 13 Assessor’s Valuation of Improvements, Minerals, Land and Personal Property, 1999.
Exhibit 14 Assessor’s correspondence to M. D. Aimone.
Exhibit 15 Mr. Aimone’s Letter to Assessor and Memo to File.
Exhibit 16 2000 Budgeted Income Statement and Budget.
Exhibit 17 Combined Balance Sheets for Ste. Genevieve Division for 1997, 1998, and Balance Sheet year end 1996.
Exhibit 18 Mississippi Lime Finance Department Data File dated April 29, 1999.
Exhibit 19 Mississippi Lime Original Cost Improvements and Fixtures dated, December 31, 1998.
Exhibit 20 Mississippi Lime Capital Leases and Master Lease Agreement dated, January 6, 1994.
Exhibit 21 Ste. Genevieve Division Production Data Cost of Sales.
Exhibit 22 Maerz Kiln Project Analysis Project Costs dated May 12, 1999.
Exhibit 23 Correspondence to Byron Francis, Attorney for Mississippi Lime.
Exhibit 24 Notice of Action by BOE.
Exhibit 25 Complaint for Review of Assessment on Real Property.
Exhibit 26 Complaint for Review of Assessment on Personal Property.
Exhibit 27 Letter to County Collector, dated December 28, 1999, Re Real Property.
Exhibit 28 Letter to County Collector, dated December 28, 1999, Re Personal Property.
Exhibit 29 Prefiled Testimony of Edward Dinan.
Exhibit 30 Prefiled Testimony of Roger Chantal.
Exhibit 31 Prefiled Testimony of Ernest K. Lehmann.
Exhibit 32 Spreadsheet – contains same information as Exhibit L.
Respondent’s Briefs
Respondent filed a Brief in these appeals setting forth the Respondent’s theory of the case, with supporting arguments.
Summary of Respondent’s Case
Testimony of Roger Chantal
Respondent’s expert, Roger Chantal performed an appraisal of the personal property (machinery and equipment, trucks, automobiles, trailers, computer equipment and office machines and furniture). Mr. Chantal utilized both a market and cost approach to arrive at a value for each item of personal property being appraised. For application of the cost approach, the appraiser utilized the Marshal and Swift Valuation Service and the depreciation factors set out by Marshal and Swift. For the market approach, Mr. Chantal relied upon sales data from various industry sources. He arrived at a fair market value for the personal property of $22,755,000. This value was then utilized by Respondent’s real property appraiser in his valuation of Complainant’s facility. Exhibits 2 & 6.
Testimony of Ernest K. Lehmann
Ernest K. Lehmann, geologist and mining consultant, assisted Edward W. Dinan in the preparation of the Dinan appraisal. Mr. Lehmann did the research and calculations relative to both the sales comparison and income approaches. The income approach performed was a discounted cash flow analysis. Exhibits 1, 5, 31 & 32.
Testimony of Edward W. Dinan
Mr. Edward W. Dinan performed an appraisal of the subject facility utilizing the Cost, Comparable Sales and Income approaches to value. The indicated values for these approaches as developed by Mr. Dinan were $103,000,000, $230,000,000 and $122,900,000, respectively. These values were reconciled by the appraiser to an indicated value of $115,000,000. This value included business enterprise valued by the appraiser at $12,500,000, due to the fact that the appraiser valued the property as a going concern. Therefore, the final opinion of value determined by Mr. Dinan was $102,500,000, for the real and personal property and mineral rights. Exhibits 1, 3, 4 & 29.
FINDINGS OF FACT
1. The subject property in appeal 99-84500 consists of real property with improvements identified by parcel number 792974, in the records of the Assessor’s office. The subject property in appeal 99-84501 consists of personal property identified by account number 5608, in the records of the Assessor’s office. The property, in both appeals, is located at 16147 U. S. Highway 61, Ste. Genevieve, Missouri. The real property consists of 821 acres of land. It is improved with a plant and ancillary buildings utilized in the production and processing of a variety of limestone products. There are approximately 25 structures on the property which include the main office building, plant, crushers, rotary and vertical kilns, repair and maintenance facilities, and ancillary buildings. Exhibits H & 1. The personal property consists of machinery and equipment, trucks, trailers, office machines, furniture and fixtures, including but not limited to: whizzers, crushers, mills, dryers, hydrators, storage bins, feeders, conveyors, scales, backhoes, tractors, trailers, tanks, trucks, excavators, hoists, air compressors, metal working machines, pumps, radios, winches and other machinery, tools and equipment used in the limestone processing facility on the subject real property. Exhibits 1 & 2.
2. There was no evidence of new construction and improvement from January 1, 1999, to January 1, 2000, which would be a basis for an adjustment to the valuation for the 2000 tax year.
3. The evidence on the record presented by both Complainant and Respondent establish that the Board of Equalization valuation was in error, accordingly the presumption that the Board correctly valued the subject real and personal property is rebutted.
4. The highest and best use of the property is the present industrial use as a limestone mine and lime production facility. Exhibit H, p. 49; Exhibit 1, p. 50; CP’s Brief, p. 7; RP’s Brief, p. 2.
5. It is appropriate in this appeal to value the real and personal property together to determine an overall value as a going concern. Exhibit H, p. 3; Tr. 27, 15-17; Exhibit 1, p. 85; Tr. 115, 2-11; CP’s Brief, p. 8; RP’s Brief, p. 15.
6. The proper approach for valuation of the property is as a going concern under the income approach. Exhibit H, 114-142; Tr. 28, 9-12; Exhibit 1, pp. 71-82, 84; Tr. 131, 16 – Tr. 132, 12; CP’s Brief, p. 8; RP’s Brief, p. 15.
7. Valuation of the property as a going concern under the income approach requires that a adjustment be made by way of a deduction for working capital and business value. Exhibit H, p. 141; Exhibit 1, Transmittal letter – 2, p. 85.
8. The business value to be deducted from the going concern value is $4,500,000. The working capital to be deducted from the going concern value is $3,000,000. Exhibit H, pp. 137, 138, 141.
9. The value of the going concern is $82,500,000. The value of the real and personal property is $75,000,000 ($82,500,000 – $7,500,000 = $75,000,000). Exhibit H, pp. 160-162.
10. The value of the mineral reserves is $6,040,000, it was not challenged by Complainant. Exhibit 1, p. 83; Tr. 7, 8-22; CP’s Brief, p. 6; RP’s Brief, p. 2; Tr. 7, 20 – Tr. 10, 2.
11. The value of the real property, including the mineral reserves, and the personal property is $81,040,000 ($75,000,000 + $6,040,000 = $81,040,000).
10. The value of the personal property is $22,755,000. Exhibit 1, Transmittal letter – 2; Addenda, pp. 1-75; Exhibits 2 & 30. The assessed value of the personal property is $7,577,415 ($22,755,000 x .333 = $7,577,415).
11. The value of the real property, including mineral rights, is $58,285,000. ($81,040,000 – $22,755,000 = $58,285,000) Exhibit H, pp. 160-162; Exhibit 1, p. 83; Tr. 7, 8-22; CP’s Brief, p. 6; RP’s Brief, p. 2. The assessed value of the real property is $18,651,200 ($58,285,000 x .32 = $18,651,200).
12. Appraisers Michael Kelly and Edward Dinan are qualified by education, training and experience to render opinions of value relative to the subject facility. Appraiser Roger Chantal is qualified by education, training and experience to render an opinion of value relative to machinery, tools, equipment and other personal property valued in these appeals. Ernest K. Lehmann is qualified by education, training and experience as a geologist and mining expert to assist in the preparation of a valuation of the subject facility. John D. Macfadyen is qualified by education, training and experience to render an opinion as to the cost for construction of a Greenfield facility.
13. A discount rate allows for a return on capital. A capitalization rate allows for both a return on and a return of capital. A capitalization rate includes a recapture component as well as the discount component. The Appraisal of Real Estate, 11th Edition, Appraisal Institute 1996, pp. 457-458; Real Estate Appraisal Terminology, Revised Edition, Society of Real Estate Appraisers, 1984, Capitalization Rate, p. 41, Discount Rate, p. 80; Property Appraisal and Assessment Administration, The International Association of Assessing Officers, 1990, pp. 267-299.
CONCLUSIONS OF LAW
Jurisdiction
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.
Board of Equalization Presumption
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).
Standard for Valuation
Section 137.115, RSMo 1994, 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, at 897.
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, 1999. Hermel, supra, 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).
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, supra.
Trier of Fact
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).
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 of 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; 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. W.D. 1992).
DECISION
Cost and Sales Comparison Approaches
The Hearing Officer was not persuaded by either the cost or sales comparison approaches to value given the agreement of both Mr. Kelly and Mr. Dinan that the income approach offered the best indicator of value for the subject property. Even in the absence of agreement by the experts as to the income methodology, the Hearing Officer would have been persuaded that this approach would provide the best indicator of value. Accordingly, the decision to be rendered as to value of both the real and personal property is based upon an income analysis.
Of the two cost approaches presented, the Kelly approach, which was based on and supported by the Macfadyen/Penta Engineering cost of a “Greenfield” plant, was the most persuasive. Had the Hearing Officer decided to utilize a cost approach analysis, either as a final determination of value or in support of a decision using cost and income approaches, he would have utilized the Kelly cost approach as a basis for his analysis. The Hearing Officer sees no benefit to be gained from a detailed discussion of each cost approach as to relative strengths and weaknesses.
As to the sales comparison approaches offered, the Hearing Officer did not find either significantly persuasive in light of the greatest reliance being placed on the income approach. Of the two sales comparison presentations, the Kelly developed approach provided a more persuasive foundation for the Hearing Officer. Had the Hearing Officer been only presented with the two sales comparison approaches, or had he elected to have utilized the sales comparison approach in support of the income or cost approach, he would have utilized the Kelly analysis. Like the cost approaches, the Hearing Officer sees no benefit to be gained from a detailed discussion of each sales comparison approach as to relative strengths and weaknesses.
Classification of Kilns
A sub-issue in the present appeal relates to the classification of horizontal, vertical and the Maerz kilns. As noted in Complainant’s Brief, p. 10, … the record on this issue is sparse, … . The record is, in point of fact, quite sparse on this matter. There is no testimony or evidence to rebut the conclusion of Respondent’s appraiser, Mr. Chantal. There is only Counsel for Complainant’s argument against the Chantal conclusion.
Complainant argues that none of the kilns should be considered as fixtures since there is an inconsistency in the Assessor’s position that some kilns are fixtures because they cannot easily be moved and others are not fixtures because their dismantling and moving would be easier. The Hearing Officer concurs that the dismantling line of demarcation to establish a fixture is not necessarily the strongest and most compelling. However, this issue was simply not developed through testimony and other evidence with sufficient clarity to permit a clear cut determination. The Hearing Officer can see that some kilns might, due to the factor of ease and cost of dismantling and reconstruction, be considered fixtures and other kilns not be considered fixtures. The Assessor’s position of some kilns being fixtures and others not could just as easily be used, applying Counsel for Complainant’s logic, to determine that all kilns should be considered as fixtures and assessed a real property.
The Hearing Officer finds himself in the nebulous twilight of speculation, conjecture and surmise on this particular point. Rossman v. G.G.C. Corp. of Missouri, 596 S.W.2d 469, 472 (Mo. App. 1980). Accordingly, the allocation of $22,755,000 for the personal property at the subject facility as determined by Mr. Chantal will stand for purposes of this Decision. The Hearing Officer recognizes that the levy of tax applicable to commercial real property and personal property may vary. However, the record does not provide sufficient basis upon which a reallocation of the kilns determined by Chantal to be fixtures can be made to assign them to the personal property classification. This is the type of element in a case such as this where the parties could have, and should have been able to have, stipulated in advance as to what items should be considered as fixtures or personal property.
Income Approaches
Both parties presented an income approach to determine the value of the going concern of the subject facility. Complainant’s expert (Kelly) developed an income capitalization approach by stabalizing the net income of Mississippi Lime over the immediate preceding five year period. This was capitalized at 12 percent to develop the value of the subject real and personal property on a going concern basis. Respondent’s experts (Lehmann/Dinan) relied upon a discounted cash flow analysis to arrive at an indicated going concern value from the income approach.
Kelly Analysis – Direct Capitalization
Mr. Kelly did an analysis of the income and expenses at the Ste. Genevieve facility for the years 1995 through 1999. See, Exhibit H, p. 119 & Exhibits A through F. From this data he stabilized the revenues for this five year period and projected a sales price per ton on a stabilized basis. Exhibit H, pp. 125, 127. The stabilized price per ton was multiplied by the stabilized tons to be sold. This produced a stabilized net sales.
The appraiser analyzed the five years of historical expenses for the subject facility. He excluded interest, depreciation and property taxes from the historic expenses to arrive at the allowable expenses for an income approach. Kelly calculated the stabilized expenses per ton and multiplied this by the stabilized tons to be sold. This produced the stabilized expenses. Exhibits H, p. 127 & K, p. 4.
The stabilized expenses were deducted from the stabilized net sales. There was also a deduction made based on the typical royalty rate for limestone utilized per year. These calculations resulted in a stabilized net income to be capitalized to arrive at an indicated value.
Mr. Kelly employed two methods to determine a capitalization rate for his income approach. One method was to utilize the overall rate from the sales of the two going concerns utilized in the sales comparison approach. These two rates were 11.4% and 7.8%. Exhibit H, pp. 129-130. The second method was the band of investment method. This produced a rate of 14%. Exhibit H, pp. 131-133. The appraiser decided on an overall rate of 12%. By capitalizing the stabilized net income previously calculated, an indicated value for the overall going concern was determined before adjustment for working capital, property taxes and goodwill (business value).
Calculations were made to arrive at an amount for working capital and goodwill. Exhibit H, pp. 135, 137. These deductions produced a value for the subject facility (real and personal property) before the deduction for taxes. Exhibit H, p. 138. In order to account for the adjustment for property taxes, Kelly estimated property taxes by multiplying the assessment percentage of one-third by the local tax rate of 4.5%. This results in a product of 1.5%. This rate is then divided into the overall capitalization rate of 12%, thus yielding a rate of 12.5%, which reflects the amount of property tax liability that has been capitalized into value. The indicated value before the deduction for taxes was divided by the factor of 1.125 to produce the value after property taxes for the subject real and personal property. The value produced did not account for a value for the reserves. Exhibit H., pp. 140-141. Mr. Kelly allocated 85% of the indicated value to personal property and 15% to real property. This was based on cost figures developed from the Macfadyen cost analysis for a greenfield plant. Exhibit H, Transmittal Letter, p. 3.
Lehmann/Dinan Analysis – Discounted Cash Flow
Respondent’s appraiser, Mr. Edward Dinan, relied upon a discounted cash flow (yield capitalization) analysis to arrive at the opinion of value under the income approach. The discounted cash flow (DCF) analysis was performed by Mr. Edward Lehmann. Exhibit 1, pp. 71-83. In performing the DCF analysis, Mr. Lehmann assumed that the property would continue to operate for 20 years and that inflation would result in increases in the value of sales and costs of 4% per year on overage. He allowed for limited capital expenditures in the DCF analysis. Lehmann did not include 1998 and 1999 cost numbers from Complainant due to the installation of the Maerz kiln. For the year 2000 he use the company’s projected cost figure. He did not follow this same practice for the sales figures because sales figures appeared to be constant. Tr. 80-81, 13-21. He did not rely on strict averages for his base line figures for his DCF, but made judgments as to whether the numbers from various years seemed reasonable. Tr. 90, 8-19. See, Exhibit 1, pp. 71 – 83. After receiving additional information at his deposition, Mr. Lehmann recalculated his DCF spreadsheet which resulted in a 2.9% reduction in indicated value for the going concern value. Exhibits L and 32; Tr. p. 93-94. The Lehmann/Dinan analysis relied upon a 12% discount rate for calculations of value under the DCF analysis.
Determination of Value
The determination of value in the present appeals rests upon a determination relative to the appropriate income approach to be utilized in the present appeals. The choice, on this record, lies between a valuation based upon a direct capitalization methodology or valuation based upon yield capitalization (discounted cash flow). In the present appeal, with the income and expense data established for the subject facility, the direct capitalization methodology presents substantial and persuasive evidence upon which a determination of value can be made.
Discounted Cash Flow
The Commission has previously addressed the matter of utilization of a discounted cash flow in Jeffery E. Smith, et al, d/b/a Lebanon Properties I, II & III v. Johnny North, Assessor, Laclede County, Appeals 97-64002 through 97-64005, STC 53rd Annual Report, 1998, pp. 435-456. In Lebanon Properties, the Commission set aside the Hearing Officer Decision which had relied upon a discounted cash flow to arrive at value. In so doing, the Commission set forth in explicit detail the general, basic and fundamental flaws, shortcomings and deficiencies inherent in reliance upon a discounted cash flow approach in an ad valorem tax appeal.
A discounted cash flow analysis is a set of procedures in which an appraiser specifies the quantity, variability, timing and duration of periodic income, as well as the quantity and timing of reversions, and discounts each to its present value at a specified yield rate. The Dictionary of Real Estate Appraisal, American Institute of Real Estate Appraisers, 1984.
Such an analysis requires the appraiser to project all income, expenses, vacancies, credit losses and reserves over a period of time in the future. Additionally, the appraiser must guess as to the possible sales price of the property at the end of the period, the capitalization during the holding period, the costs of sale and the net gain on the property at the end of the period. Finally, the appraiser must speculate as to the correct interest or yield rate in order to discount the present value of the projected income stream and sales price.
A discounted cash flow is only viable if all of the information utilized by the appraiser is extracted from the marketplace. Determining income, expenses and yield rate 40 years into the future is not market derived evidence. Finally, the more assumptions which are made and the more variables which are used, the greater the likelihood of error.
We are called upon to find the value of the properties as of January 1, 1997. In order to do that, we must use facts which exist on the appraisal date. A discounted cash flow analysis based upon hypothetical facts 40 years in the future can only leave us in the nebulous twilight of speculation, conjecture and surmise. Rossman v. G.G.C. Corp. of Missouri, 596 S.W.2d 469, 472 (Mo.App. 1980). Consequently, we find that the appropriate methodology for determining value of this property is the direct capitalization income approach.
The pronouncement of the Commission on October 13, 1998 relative to the use of the discounted cash flow analysis in Lebanon Properties finds application today in the present appeals. The Commission has consistently not found favor with the discounted cash flow methodology. Nance v. STC, 18 S.W.3rd 611 (Mo. App. E.D. 2000); Equitable Life Assurance Society of the United States v. Morton, 852 S.W.2d 376 (Mo. App. 1993). The discounted cash flow procedure has, likewise, not been well received in sister jurisdictions. See, University Plaza Realty Corp. v. City of Hackensack, 12 N.J. Tax 354, 368 (N.J. Tax Ct. 1992); Equitable Life Assurance Society v. County of Ramsey, 430 N.W.2d 544 (Minn. 1995); Southern Pacific Transp. Co. v. Oregon Dep’t of Revenue, 11 Or.Tax 138, 157 (Or.T.C. 1989). The Hearing Officer finds no basis upon this record which would justify and substantiate a reversal of the positions espoused in the sources just cited. Accordingly, the discounted cash flow approach is not deemed to be substantial and persuasive evidence to establish value in the present appeals.
Complainant’s Direct Capitalization Persuasive
The direct capitalization approach developed by Mr. Kelly was based on income, expense and production data taken from the actual operation of the subject property. It was appropriately stabilized to arrive at a net operating income factor to be capitalized. The capitalization rate of 12% was appropriately developed. The rate was further substantiated by Respondent’s development of the discount rate for the yield capitalization performed by Respondent’s experts. Since Respondent’s discount rate was 12% and only reflected the return on investment, it certainly supports a capitalization rate of 12% which would include the discount, plus the recapture rate for the return of the investment. In essence, there could be no dispute between the experts for Complainant and Respondent that Mr. Kelly’s capitalization rate of 12% was appropriate for his direct capitalization.
The fact that Kelly relied upon the actual performance for the subject facility during the five year period from 1995 through 1999 provides a solid basis for the information and assumption used in his analysis. The most appropriate source of data from which to develop the going concern value for the subject is the actual production, sales and cost information from the recent history of this facility. By looking to this hard, factual data, conjecture and speculation as to production, sales and costs into the future whether 5, 10 or 20 years is avoided. Kelly’s development of his approach looking to the immediate past performance of Complainant’s mine and plant is solidly market-oriented. This approach reflects reasonable conclusions derived from substantial and persuasive data which provides a sound basis relative to the expectations of a potential buyer of this facility as of January, 1999.
The valuation of the subject facility at $75,000,000 plus the mineral reserves ($6,040,000) for a total value of $81,040,000 is substantially and persuasively established by this record.
Respondent’s Discounted Cash Flow Analysis Not Persuasive
The discounted cash flow analysis presented by Respondent’s experts lacked persuasiveness on several points. A review of the methodology presented reveals a number of errors, miscalculations and unsupported assumptions that go to the very heart of this approach and ultimately render the analysis of no probative value in the present appeals.
The critical factor in applying the discounted cash flow procedure is that everything is driven by the assumptions which the appraiser makes for constructing the analysis. There are inherent problems within a discounted cash flow analysis due to the assumptions that have to be made. Tr. 154, 6-10. In the present appeals, the Lehmann/Dinan analysis made assumptions that the plant would operate for an additional twenty years with sales and costs increasing by 3% per year over that twenty year period and that there would be no major capital expenditures, only routine maintenance.
Operation Without Major Capital Expenditures
The Lehmann/Dinan approach first assumes the existing plant will operate for another twenty years without major capital expenditures. Complainant’s expert did a significant analysis to determine the effective age of the facility. The estimated economic life of the facility is 30 years, but the effective age, by weighted average, of the plant is 22 years. The Hearing Officer does not take this to mean that Mr. Kelly is suggesting that the plant will close in 8 years. However, it does demonstrate that it is reasonable to assume that expenditures will be required in order to insure that the plant continues to operate in a modern and up to date environment. The assumption by Lehmann/Dinan that the plant can continue to operate and increase in sales and profitability with only routine maintenance costs is not supported by information and data from the industry, nor is it well founded in rational logic. The Hearing Officer knows from the record that a major capital expenditure was made within recent history by the addition of the Maerz kiln. If the plant is to continue in operation for the next twenty years, under the assumption made in the Lehmann/Dinan analysis, it seems reasonable that major capital expenditures may have to be made into order to insure that the facility operates in the most economical and efficient manner.
3% Growth in Sales and Costs
The Lehmann/Dinan approach next assumed that sales and costs will increase at 3% per year. This is based essentially on an inflation factor. The increase in sales revenue is not based on an assumption of increased production. Respondent’s experts stabilized production for the Complainant’s facility over the 20 year period.
Production
No data was presented which would demonstrate that within the limestone industry that production has been stable for the last 5, 10, 15 or 20 years. The data presented relative to the subject plant failed to demonstrate a stabilizing of production for the past 5, 10, 15 or 20 years. The data for the production years 1995 through 1999 fail to establish that the subject plant has had a stabilized production over this period of time, at the level projected and assumed by the Lehmann/Dinan analysis. The stabilized (average) production for 1995 – 1999 was slightly less than the total tons of product assumed by Respondent’s experts. The Lehmann/Dinan assumed production was 7.8% above the actual production for 1999 and 1.5% above actual production for 1998. It was 2.1% above the Complainant’s projected production for year 2000.
The actual plant production figures, for the subject facility, establish that from 1995 to 1996 there was a 7.6% decrease in total production. From 1996 to 1997 there was only a 2.1% increase. Production then decreased by 2.5% from 1997 to 1998. Production was down 4.4% from 1998 to 1999. The actual production figures establish that for the period from 1995 through 1999 there was an average decrease in production of 3.1% per year, not a stabilizing of production. The actual history of this facility clearly identifies that tons of product sold has been essentially flat during the period 1995 through 1998 and down in 1999.
Sales
The next assumption made in performing the Respondent’s analysis is that sales will increase by 3% per year over the 20 year period of the analysis. The increase in sales is not, as has been addressed above, due to an increase in production. The increase in sales comes entirely from an increase in the price of lime over the twenty year period at a inflation rate of 3%. Tr. 74, 15-21. Respondent’s expert (Lehmann) concurred with Complainant’s appraiser that the price for lime over the last five years was fairly constant. Tr. 75, 5-6. Mr. Dinan also agreed that sales prices for lime have been flat or stable over the last five years. Tr. 154, 14-22. Industry data demonstrates that lime pricing has remained flat over the last five years. Exhibit H, p. 125.
The actual sales figures for the subject plant demonstrate that from 1995 to 1996 net sales decrease by 2.5%. For the period of 1996 to 1997 sales were essentially flat. From 1997 to 1998 sales again decreased by 3.2% and then remained flat for 1998 to 1999. Overall this was an average of 1.425% decrease per year in net sales.
There is simply no basis within this record to support the assumption that Complainant’s sales will increase by 3% per year over the next twenty years. The best that can be concluded is that sales prices will remain flat.
Costs
Like production and sales figures, there is no information presented in this record to establish that the past history of the industry would support a 3% per increase in costs. The actual figures for the subject facility do not establish a 3% per year level of increase in costs from the past five years of data. Respondent’s expert (Lehmann) in conducting a recalculation (Exhibit 32) of his discounted cash flow analysis utilized an average for costs based only on the years 1995 through 1997, instead of an average based on years 1995 through 1999, like he did with the sales figures. The recalculation performed by Lehmann resulted in an indicated value under the discounted cash flow method of 3% ($3,800,000) less than the original calculation made for the Dinan appraisal. Exhibit 32, Exhibit 1, p. 82. The development of the base line figures for both sales and costs should have been conducted in a consistent manner, utilizing the five year averages for both.
Summary of Assumption Flaws
In this particular case, the utilization of the discounted cash flow method rests upon the worth and validity of three critical elements – production, sales and costs. If any one of the legs of this three legged analysis is defective, then the stool will not properly support the proposed value. In the present appeal, all three legs are flawed. They are broken. The discounted cash flow stool does not stand.
The record does not establish a level of production stabilized at the level utilized by Respondent’s experts. The record will simply not support the 3% assumption. Neither industry data or actual data attributable to the subject facility demonstrate the worth and validity of the 3% assumption. Furthermore, the assumption as to the baseline data to be used to which the 3% assumption was to be applied could not be supported by data from the subject facility. A slight variation, plus or minus, for the base line data for production, sales or costs and a slight variation, plus or minus, in the 3% assumption results in greatly differing indicated values.
A portion of the conclusion expressed by the Commission in Lebanon Properties, supra, bears repeating at this point. A discounted cash flow is only viable if all of the information utilized by the appraiser is extracted from the marketplace. … . Finally, the more assumptions which are made and the more variables which are used, the greater the likelihood of error.
The assumptions made, by Lehmann/Dinan as to operation without major capital expenditures, production, sales, costs, yield rate and other variables 20 years into the future, are not market derived evidence. Having no support from past industry data or past facility operation data, the assumptions are nothing more than conjecture and speculation. The fact that the assumptions made by the Lehmann/Dinan analysis are consistent with what may be done in the valuation of mineral production facilities generally, does not raise such assumptions to the level of substantial and persuasive evidence. For such assumptions to have validity, weight and probative value in the evidentiary process of determining value for the subject facility, there must be market data, not industry practice, to support each assumption.
The Hearing Officer cannot ignore the economic realities demonstrated by Complainant’s and Respondent’s evidence, relative to the actual operation of the subject facility. These must be taken into consideration and account when making a determination of value for ad valorem tax purposes. Missouri Baptist Children’s Home v. STC, 867 S.W.2d, 510, 513-514 (Mo. 1993). The economic realities of the subject facilities past five years will not support the assumptions upon which Respondent’s experts based their value.
Complainant’s Rebuttal
Kelly – Discounted Cash Flow Recalculation
Complainant presented rebuttal evidence as to Respondent’s discounted cash flow methodology. Complainant’s expert, Mr. Kelly, developed the discounted cash flow analysis utilizing the identical methodology employed by Mr. Lehmann in preparing his revision as shown by Exhibit 32. However, Kelly, used a five year average as the baseline number relative to costs. This produced an indicated value for the real and personal property which was directly in line with Kelly’s value, before adding the value for the mineral rights. Exhibits M & N.
Roberts – 2000 Budget
Complainant also presented rebuttal evidence from Donald Roberts that established the budget numbers for the year 2000, which had been employed by the Lehmann/Dinan analysis were not appropriate. Complainant’s actual income and expenses for 2000 were not meeting budget. Sales were off 5% and gross margin and operating income were off as well. Therefore, to the extend that the Lehmann/Dinan analysis had rested upon 2000 budget numbers, the indicated value obtained under even the revised discounted cash flow methodology was an inflated value.
Conclusion
Complainant’s evidence substantively and persuasively establish the value for the subject real and personal property, not including the mineral rights, to be $75,000,000. The value of the personal property is $22,755,000. The remaining value of $52,245,000 is real property value. The value of the mineral rights ($6,040,000) added to the real property value results in a total real property value, including mineral rights of $58,285,000, for a total value of $81,040,000, real, personal and mineral.
ORDER
The assessed valuations for the subject properties as determined by the Assessor and affirmed by the Board of Equalization for Ste. Genevieve County for the subject tax day are SET ASIDE.
The assessed value for the subject property in appeal 99-84500 for tax year 1999 and 2000 is set at $18,651,200.
The assessed value for the subject property in appeal 99-84501 for tax year 1999 is set at $7,577,415.
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 1994.
If an application for review of this decision is made to the Commission, any protested taxes presently in an escrow account in accordance with these appeals 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 Ste. 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 these appeals. 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 March 12, 2001.
STATE TAX COMMISSION OF MISSOURI
W. B. Tichenor
Chief Hearing Officer
ORDER
DENYING APPLICATION FOR REVIEW
OF HEARING OFFICER DECISION
On March 12, 2001, Chief Hearing Officer, W. B. Tichenor, entered his Decision and Order (Decision) setting aside the assessments by the Ste. Genevieve County Board of Equalization and finding value for the real and personal property which were the subject of these appeals.
Respondent’s Grounds for Review
Respondent filed his Application for Review of the Decision. The grounds stated in the Application for Review may be state in a summary fashion as follows:
1. The Hearing Officer erred in adopting the income capitalization approach of Complainant’s appraiser.
2. The Hearing Officer erred in not adopting the discounted cash flow analysis of Respondent’s appraiser.
3. The Hearing Officer erred in his application of the relevant case law and Commission decisions.
Standard Upon Review
The Hearing Officer is not bound by any single formula, rule or method in determining true value in money, but is free to consider all pertinent facts and estimates and give them such weight as reasonably they may be deemed entitled. The relative weight to be accorded any relevant factor in a particular case is for the Hearing Officer to decide. 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).
The Commission will not lightly interfere with the Hearing Officer’s Decision and substitute its judgment on the credibility of witnesses and weight to be given the evidence for that of the Hearing Officer as the trier of fact. Black v. Lombardi, supra; Lowe v. Lombardi, 957 S.W.2d 808 (Mo. App. W.D. 1997); Forms World, Inc. v. Labor and Industrial Relations Com’n, 935 S.W.2d 680 (Mo. App. W.D. 1996); Evangelical Retirement Homes v. STC, 669 S.W.2d 548 (Mo. 1984); Pulitzer Pub. Co. v. Labor and Indus. Relations Commission, 596 S.W.2d 413 (Mo. 1980); St. Louis County v. STC, 562 S.W.2d 334 (Mo. 1978); St. Louis County v. STC, 406 S.W.2d 644 (Mo. 1966).
DECISION
A review of the record in the present appeals provides substantial and persuasive evidence to support the determinations made by the Hearing Officer. Quite simply, Complainant’s expert persuaded the trier of fact relative to the going-concern value of the subject facility. Respondent’s expert failed to persuade the trier of fact.
While reasonable minds might differ on the Hearing Officer’s findings and conclusions, a reasonable mind could have conscientiously reached the result which the Hearing Officer reached on each of these points. There is competent and substantial evidence to establish a sufficient foundation for the Findings. The Commission finds no basis to support a determination that the Hearing Officer acted in an arbitrary or capricious manner or abused his discretion as the trier of fact and concluder of law in this appeal. Hermel, Inc. v. STC, 564 S.W.2d 888 (Mo. 1978); Black v. Lombardi, 970 S.W.2d 378 (Mo. App. E.D. 1998); Holt v. Clarke, 965 S.W.2d 241 (Mo. App. W.D. 1998); Smith v. Morton, 890 S.W.2d 403 (Mo. App. E.D. 1995).
The facts found by the Hearing Officer are supported by substantial evidence upon the whole record. A reasonable mind could have conscientiously reached the same result based on a review of the entire record. Phelps v. Metropolitan St. Louis Sewer Dist., 598 S.W.2d 163 (Mo. App. E.D. 1980).
The Hearing Officer addressed in appropriate manner the issue of the utilization of the discounted cash flow analysis and the deficiencies contained therein in this appeal. Decision, Determination of Value, pp. 18-20; 21-26. The Commission sees no need to restate the analysis and discussion of the Hearing Officer. The Hearing Officer correctly discussed the applicable and appropriate case law and prior Commission decisions. In particular, the Hearing Officer’s conclusions as to the discounted cash flow analysis are in accord with the Commission’s decisions in Nance v. STC, 18 S.W.3d 611 (Mo. App. E.D. 2000); Equitable Life Assurance Society of the United States v. Morton, 852 S.W.2d 376 (Mo. App. E.D. 1993) and Jeffery E. Smith, et. al d/b/a Lebanon Properties I, II & III v. Johnny North, Assessor, Laclede County, Appeals 97-64002 through 97-64005, STC 53rd Annual Report, 1998, pp. 435-456.
The Hearing Officer did not err in his determinations as challenged by Respondent. The Respondent’s points are not well taken.
***
ORDER
The Commission upon review of the record and Decision in this appeal, finds no grounds upon which the Decision of the Hearing Officer should be reversed or modified. Accordingly, the Decision is affirmed.
Judicial review of this Order may be had in the manner provided in Sections 138.470 and 536.100 to 536.140, RSMo within thirty days of the date of the mailing of this Order.
SO ORDERED August 28, 2001.
STATE TAX COMMISSION OF MISSOURI
Sam D. Leake, Chairman
Bruce E. Davis, Commissioner
Jennifer Tidwell, Commissioner